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Thoughts on "outsourcing" the management of your investments

I’ve been meaning to write on this topic for a bit so the article below (link included) prodded me to write to the author. The article is a great read and I hope you find my email response to the author of interest too.



I really enjoyed reading your recent article. You have access to some interesting people and they’ve given you and, in turn, your readers great advice. I’m in the “business” but I thought I’d quickly share my perspective having worked alternatively at a financial planning firm (AXA Equitable), two of the larger private banks in the US (US Trust and Brown Brothers Harriman) and a few hedge funds….my experience basically covers the entire spectrum!
Some general rules and things to think about re: selecting someone to manage your investments:
  1. People need to understand that by hiring a firm or individual to manage their money they are “outsourcing” the function of allocating their own capital – For example Cody Lundin allocates his capital in a way that makes sense to him and he doesn’t need to allocate out this function. The majority of people do need to hire someone to help them.
  2. If people outsource the allocation of their capital they need to agree or at least understand the basic tenets of the investment principles of the firm they outsourced to – in Cody’s case he could actually outsource too to someone he might recognize as being better than he might be at buying food, tools or land. The same applies to any person investing in real estate, stocks, bonds, etc. We end the idea of investors being “naïve capitalists” by having them take at least some responsibility for how their money is being managed.
  3. People need to have a firm grip on the incentives and structure of any entity they outsource to – Do they have your best interests in mind? Are they incentivized to make their investors money or the firm money at the expense of the investors?  There isn’t a 3rd alternative. The choice is between those two options.
  4. The outsourced entity needs to have a big enough toolkit to take advantage of opportunities in the market – Do they have the ability to put investment dollars where it makes the most sense?  If investors give money to a provider to do a certain thing (and it maybe the only thing the outsourced entity is good at) the outsourced entity WILL ALMOST NEVER GIVE IT BACK even if there are no good investment opportunities for them now or in the foreseeable future.
  5. People need to make sure the investment professionals entrusted with making their investment decisions have the skill and expertise to execute on their stated mission – past performance, bios, referrals, etc. all help to establish this.
  6. People need to TRUST the firm or people they are hiring to make investment decisions on their behalf – If they do not then 1-5 are meaningless.
 All is not lost for you or the general investing public. Players in our industry will recognize a profitable way to engage the “smaller” investors. It’ll just take some time and my guess is that it will be heavily reliant on technology - - for communication purposes as well as in managing accounts.