Are you creating customized investment solutions or personalized investment solutions? Do you know the difference?
PERSONALIZE: to design or tailor to meet an individual’s specifications, needs, or preferences
CUSTOMIZE: to build according to individual or personal specifications or preference
Personalized Investment Portfolios
The difference between personalized and customized investment portfolios is often confused, but it is distinct, and it’s right there in the definition. Personalized means that an overarching portfolio of potential investment strategies is designed and tailored to fit an individual’s specific needs or preferences—such as risk tolerance, income needs, life goals, and time until retirement for example. Customized means a portfolio is custom-built from the ground up, out of all potential investment vehicles in the marketplace.
Or, to look at it another way, creating personalized portfolios is like being a chef on “Chopped” or “Iron Chef”; you have a defined set of ingredients from which to create your dish and no two meals created with them will be exactly the same due to nuances of the chef and type of meal specified by the diners.
Customized Investment Portfolios
Creating customized portfolios is comparable to being Julia Child in “The French Chef” where all ingredients in the world are possible from which to choose, but at the end of the day, one person can only know so much so you are probably going to end up with the chef’s specialty flavor: for example French, in this case. If you were hoping for French cuisine, then how wonderful! But what if you were hungry for something else, like say Mexican?
Do you see the difference a little more clearly now?
Just as there is merit in specialty cuisine, there is merit in customized portfolios. There are a select few financial advisors with the skill to create a truly customized investment portfolio for every single client—provided that they don’t have many clients, or specialize in a particular type of investment, and don’t spend their time doing much else beyond researching and managing investments. Even then, the reality is that no one person can know everything about every potential investment option. There aren’t enough hours in the day—especially if you are not just managing investments, but running a financial advisory business.
If you are one of these advisors and have figured out a way to make it work for both you and your clients then congratulations are in order. You are definitely the exception and not the rule.
The Ugly Truth about Customized Investment Portfolios
More often, what happens when an advisor claims to provide customized portfolios is that they are choosing from passively managed funds, which themselves are not typically customized. (How customized can a broadly diversified index fund that holds scores or even a hundred equities really be?!) Or perhaps they are building portfolios of individual equities—which takes a considerable amount of time and resources to execute well.
Another hazard for independent advisors that attempt to offer customized investment portfolios—and manage everything themselves—is that their business suffers. How can you both manage every nuance of your clients’ investments, including the extensive research and trade activities necessary to do so, and manage every aspect of your business well without burning yourself out? Custom isn’t scalable; there is a finite number of clients you can manage with a customized approach.
The Hidden Benefit of Personalized Investment Portfolios
In contrast, a personalized approach to creating investment portfolios allows the advisor to select the right mix and allocation of investments from a suite of targeted investment strategies—much like Iron Chef Morimoto and his high-quality theme ingredients. Knowing the client’s risk tolerance, needs and financial/life objectives provides the ability to develop a tailored, goals-based financial plan and personalized investment portfolio. Investment strategies designed to achieve certain goals—such as delivering yield, growth, or protecting irreplaceable capital—are created by selecting high quality companies.
High quality companies are those with exceptionally strong balance sheets and earnings with a large cash component that are trading at a large discount to their true value based on reasonable profit growth assumptions. This method provides a concentrated portfolio of companies with upside potential, regardless of the correlation of their returns. While it may lead to swings in portfolio value due to the concentrated nature, there is a much better chance at delivering alpha and performing as expected to over a 3-5 year timeframe.
This personalized approach doesn’t chase performance over 2-3 quarters, but has a long-term focus that puts the portfolio in a better position to ride out volatility over the short term. Knowing how to cook a variety of high-quality meals from a range of hand-picked ingredients will satisfy more palettes. However, the key is to not just have a personalized approach, but to use high-quality investment strategies. If you are simply personalizing from low quality, pre-packaged “bulk ingredients” you are doing a tremendous disservice to your clients.
I challenge you to think about how you are managing your clients’ investments today—are you providing the truly customized solutions that you think you are? Or is your approach more personalized, but with low-quality ingredients? Can you feel confident not only in your approach, but in what you are cooking with and what you are ultimately serving?
For advisor use only. Not intended for client distribution.