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Douglas Goldstein, married, father of four, is the owner and director of Profile Investment Services (www.profile-financial.com). He is the co-author of the book "Rich As a King: How the Wisdom of Chess Can Make You a Grandmaster of Investing," and blogs on www.richasaking.com on how using chess... More
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Profile investment services, ltd.
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Gain perspective. Your investments.Your future.
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Rich As A King - How the Wisdom of Chess Can Make You a Grandmaster of Investing
  • Your Guide To Asset Management 0 comments
    Mar 10, 2014 9:22 AM

    As an investor, you may have heard of the concept of separately managed accounts, or asset management. But what does that mean, and why run your finances that way?

    On the Goldstein on Gelt Show, I recently asked John O'Connor, president and chief investment officer of 3D Asset Management to explain these terms and how they differ from mutual funds or other, similar types of investments.

    Below is a transcript of the interview. Read on to find out what Mr. O'Connor had to say.

    Douglas Goldstein: What is 3D Asset Management all about?

    John O'Connor: We use it metaphorically. As opposed to viewing a picture or a photograph of something that looks the same from every angle, we view investing as multi-dimensional. We have our own view of it, and we dive into the weeds and get very technical and do a lot of asset class analysis, and then eventually security analysis, to build portfolios. But we realized that since we almost work exclusively through advisors, they've got their own view of it. They are approaching client goals and challenges in a unique way in every situation, so we've got to take that into consideration when we're working through our investment process. Then ultimately, investors, the end-clients, look at what it is they're provided from a different angle than either the advisor or we do. So we have to take that into account. We try to take a very technical complicated process, make it simpler to explain, and ultimately easy and service-friendly to deliver.

    Douglas Goldstein: From an end-user's standpoint, what would his relationship be with a company like yours?

    John O'Connor: Oftentimes, we'll have a direct contractual relationship, which means that we're a fiduciary. We've got an obligation to put the clients' interests first, but we always do that through someone like a CFP or a financial advisor that knows that client, that married couple, that retiree, that corporate executive. He knows their situation, their goals, their aspirations, their risk tolerance, inside and out in a way that an investment manager can never know because we don't sit down with the client on a regular basis. We base our management on the information that you provide us.

    Douglas Goldstein: What makes the company like yours different from client buying a mutual fund? I know that you're very involved in exchange-traded funds (ETFs), so why wouldn't the client just go ahead and buy those?

    John O'Connor: We've got a few ways to get our separately managed accounts to people, but most of our money is managed with well-known custodians, such as Charles Schwab. So an individual account sits at Schwab, and then if there are any differences between two of your clients, you let us know that and those two accounts might be managed slightly differently. For example, if somebody has municipal bonds that they want to hold outside of our managed account, we can also put that in a Schwab account and report on it. This is as opposed to just buying shares of a mutual fund, where those shares are going to be identical regardless of the client's age, risk tolerance, position in life, or their goals, or anything like that.

    Douglas Goldstein: Could you explain a little more what the term "separately managed account" really means?

    John O'Connor: It's one of those things that are functionally named. It's a brokerage account, held as I say with a well-known custodian like Charles Schwab. It's in the name of the client, and the investor will get a statement from Charles Schwab every month, either physically or online if they prefer. It's a separate account in their name, but we've got the authority through their contract that they have signed with us to go in and do trades and cause a check to be sent out if that is something that the client is looking for, or money to be moved from one place to another. Everything is always with the client's authorization. It is a separate account that is managed by 3D.

    Douglas Goldstein: Often. I describe this model of having money managers handling a portfolio by telling the client, "You are like the president of your own company. You hire someone like me as the CFO, the chief financial officer, to help and advise you in dealing with your money, whether in stocks, bonds, or real estate, or through financial planning, I serve in that capacity, and then it's my job as the CFO to find managers to handle the day-to-day operations of buying and selling." Do you think this is a good way to describe what's going on?

    John O'Connor: I think that's a great analogy. We describe ourselves to advisors and end-users as somebody's outsourced investment analysis and investment services department. You may use a technology firm to outsource the maintenance of your networks. A lot of advisors use us to outsource the research and development involved with the investment process, even to the extent that the trading, reporting, and the client's actual account administration falls on our shoulders as well. It's a great way to run a business. I know we outsource several things as well. Our technology is one, and a few others. It's an efficient way to run a firm.

    Douglas Goldstein: Let's say that a financial advisor comes along and says "I've got a retired client. We've done a financial plan and we want to have half of his portfolio in a global equity portfolio and half in bonds, and we'd like to assign to you the global equities." When you get that assignment, how do you know what to buy?

    John O'Connor: We use exchange-traded funds or ETFs as our primary means of accessing the various markets around the world. We take the information that you've provided us on your client's goals and risk tolerance and objectives. What we try to do is build a globally diversified portfolio that is going to shoot for a targeted rate of return with a managed amount of risks. In plain English, we're trying to access opportunities around the world. The way we do it is easy, with 15 or so ETFs in the portfolio. We can invest across 45 countries in around 10,000 underlying stocks, large stocks, tiny stocks, and with various financial fundamental tilts that are fairly low cost and very efficient.

    Douglas Goldstein: Would you consider yourself active managers or passive managers?

    John O'Connor: We certainly use passive products. The exchange-traded funds we use are all index based in some way, shape, or form. We are what we refer to as strategic managers. So we've got a strategic asset allocation, but it's not quite set it and forget it. Based on changes in various economic events, market events, or financial events around the world, we will adjust the portfolio. We'll always be fully invested. So in the example you gave, if you're hiring us to manage the equity or stock portion of someone's portfolio, we'll always be in the market, but we might be more in the U.S. markets than we traditionally are if we think the U.S. is letting the world out of the global recession, or we might be in more small caps than a normal model would be if we think there's more opportunity in small stocks.

    Recently, on the bond side of our portfolios, we shortened up the average maturity in the bonds because we felt that the longer bonds are going to sink through interest rate rises, bond prices will fall, and we want to prevent the portfolios from dipping as a result of that.

    Douglas Goldstein: There's certainly a big debate in the industry about whether tinkering with the portfolio adds a value or subtracts value, or if it's just kind of value neutral. How do you see the different arguments on that?

    John O'Connor: We based all of our investment process on academic studies over long periods of time. We don't actively manage, but we do rebalance periodically. Everybody, I think, would agree that ideally you want to buy low and sell high, and by rebalancing a portfolio back to its target periodically, you'll be doing that so you'll sell your overpriced asset classes and you'll be buying in to asset classes that have maybe depressed in value.

    Douglas Goldstein: How often do you do something like that?

    John O'Connor: We balance annually, or if an asset class or particular part of the portfolio has gone outside of its determined tolerance range. We don't try and predict the market, but we do see trends developed, and we understand changes in the global macro environment and even regional changes around the world.

    Douglas Goldstein: When people look at a portfolio, or sometimes people want to say that, "That's a conservative or that's an aggressive or moderate portfolio," do you find those words appropriate to use when looking at a portfolio that you would manage?

    John O'Connor: I do, and the one thing I disagree with when a lot of people talk about it is where diversification comes into that equation. A conservative portfolio with us by its nature has more bonds than stocks, and today more short-term bonds. But if somebody says that it's a conservative portfolio, so you shouldn't have small stocks or emerging market stocks, I would vehemently disagree with that. You should have them because, to put it in layman's terms, they're going to be zigging when large stocks are going to be sagging, and that by definition, decreases portfolio risks. That's the way we view risk management in a portfolio.

    Douglas Goldstein: How can people follow your work?

    John O'Connor: The best way is to call their advisor and ask them about it, because that's the way we work with clients. But we do have a website, which is www.3dadvisor.com. We're always happy to talk to people, but we'll typically refer them to an investment professional that can get to understand their goals and objectives.

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