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Advisors Warned Against Blindly Sticking to Playbook

By R.A. Monroe January 29, 2016

This week we interviewed Tom Wilson, senior investment manager and managing director of Brinker Capital, an investment management firm based in Berwyn, Pa. Wilson recalls how taking a client’s full financial picture into account caused him to deviate from his typical investment philosophy.

Anyone who’s been a financial professional for a decent period of time has a preferred way of doing things. Some people always want to have emerging market exposure, others prefer a strict allocation between three asset classes – it all depends on how you were trained and what you’ve learned over time.

But every now and then you run into a situation that might cause you to go against your asset allocation principles. In those moments it’s crucial to be flexible enough to deal with the situation on the ground, rather than blindly sticking to your preferred way of doing things.

During the credit crisis, I was managing the endowment for a private school that primarily catered to wealthy families. When the markets started tanking, they became very concerned that they wouldn’t meet their enrollment targets for the next year.

The board realized that if their enrollment dropped they might need to borrow from their endowment in order to come up with the funds to keep the school operational over the next year.

When all the issues were laid out on the table it became apparent we needed to deviate from the playbook we typically followed. We realized we needed to come up with some liquidity within the portfolio while also making the endowment more conservative.

Tom Wilson

Opting to go conservative while the market is in a downturn goes against our investment philosophy. We’re all taught that selling into a declining market is pretty much the worst investment decision you can make.

If we were merely looking at the portfolio that’s not the decision we would’ve made – it certainly wasn’t the best option from a return point of view. But I realized that in this situation, what was going on outside the portfolio mattered more than what was going on inside of it. After all, it wouldn’t really matter if the school’s endowment portfolio was doing fabulously if the school wasn’t able to operate as a going concern.

If advisors have their blinders up, they risk being too rigid in situations like these, where outside circumstances cause you to veer from your investment policy statement. When we took off our blinders, we realized that the most important thing was ensuring the school would be able to continue to operate smoothly over the next year, no matter what was going on in the markets.

Ultimately, the school’s enrollment numbers ended up being fine and they didn’t have to borrow from the endowment after all. But none of the members of the investment committee expressed any regrets about our decision.

Whether you’re dealing with an endowment or an individual, it’s so important to be able to put yourself on the other side of the table. By doing so you’ll be better able to understand the complete financial situation of your client. You’ll also be less at risk of making a decision that, while correct according to your investment philosophy, could be wrong for the client in the long run.