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Is portfolio compliance a ‘state’ or a process ?

By 20 April 2022November 4th, 2022No Comments

A lot of people are asking me at the moment about what portfolio compliance is.

Well for professional money managers to date, simply put portfolio compliance is making sure a client’s investment portfolio is in accordance with any mandates or instructions that you agreed with them.

Simple? Sometimes yes, but not that easy in a world of volatile markets, changing investment policies and research, and also changing investor circumstances, especially if that investor is a taxpayer in the western world of modicum wealth. This is all highlighted with increased regulatory scrutiny also.

Why do these things make it harder? Well apart from the simplicity of ‘Does the investment portfolio fall within the prescribed asset allocations and densities’ at a point in time, there are the issues like the below that need to be considered:

  • if and when I want to change the investment portfolio, I may need to think about some sensible thresholds for trading so the portfolio does not get negatively impacted by transactional costs (often brokerage). Many would argue that there is little point in keeping in mandate if the costs of doing such are adversely detrimental to its health!
  • If the owner of the portfolio is a taxpayer, perhaps paying as much as 50% in capital gains tax for poorly timed sales, then my reputation as a money manager may be at risk if I am not considerate of this when trying to keep within asset allocation mandate. I am sure that consumers would be happier outside the mandate to avoid paying a tax bill that after consideration of such would significantly impact the portfolio value or desired outcomes

So is portfolio compliance a state? Yes from an investment perspective, is it a process? Well probably if you want to lead your client to their outcomes as opposed to just investment outcomes based on an investment mandate.

Clearly, there is an introduction of ‘other’ items now to be considered in consumer portfolio mandates if a money manager is going to seek to deliver the best outcome (not necessarily performance) for an investor, and these need to be put in the context of that investor.

We are already seeing with the more forward-thinking clients of Financial Simplicity that in consultation with their clients, it is not only about agreeing on an investment mandate, but also agreeing to what extent that mandate legitimately deviates from the investor’s best interest.

So back to the question, then is compliance a ‘state’ or a ‘process’ – well in my view, moving forward for consumers, it is more about a continual process of trade-offs that need to be carefully and constantly considered to resolve whether the portfolio is in a state that would be regarded as best fit for the consumer’s desired outcomes.

If you are facing these challenges in your business and wondering also how to achieve constant ‘compliance’ monitoring of investor portfolios considering this new era of mandates, with more regulatory pressures, drop me a call.

Stuart Holdsworth

Author Stuart Holdsworth

Stuart has over 30 years of experience in the use of technology for the strategic competitive advantage of businesses in the financial markets and investment industry.

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