Use Care in Selecting Advisory Firms
Several noteworthy points were raised in the Feb. 9 article "Natural Person CUs Plunge into DIY Investing" [page 6].
Credit unions are wise to consider a variety of options to meet their investment needs. I also applaud the article’s emphasis on education. At ALM First Financial Advisors, we have found that clients who participate in our training initiatives perform better across all facets of investing fiduciary responsibilities.
With the need for education and guidance in mind, I offer a few words of caution about where credit unions receive their investment advice.
Remember, broker-dealers are in the business of selling investments. The relationship between credit unions and brokerage sales representatives is fundamentally flawed. Broker-dealer representative compensation is generally tied to maximizing profit on a per transaction basis, and if a security is not bought or sold, the broker-dealer receives no compensation. This creates a strong incentive to sell, regardless of whether or not that security fits the client’s overall portfolio or balance sheet strategy. Objectivity is also an important component of analyzing and selecting a security, and some broker-dealers are more focused on the profitability of each investment transaction rather than the overall long-term performance of a client portfolio.
An important concern for credit unions is not necessarily what to invest in, but rather what not to invest in. If a potential investment has a higher spread, and it looks too good to be true, there’s probably a good reason. A lot of the times, these risks aren’t clear without in-depth analysis. There are other strategies that a credit union can implement to improve their investment portfolio returns without taking excessive risks.
The investment process doesn’t end with the initial transaction. Positions must be regularly monitored, and not just for the obvious concerns. Investment positions should be evaluated within the context of the overall portfolio, as well as the entire balance sheet. Credit unions need adequate analytical tools and the expertise to utilize those tools in order to effectively and objectively assess the ongoing value and risks associated with a particular investment. Credit unions need to ask, "Is this position still serving its purpose?"
Managing an investment portfolio requires knowledge, skill and ongoing attention to both investment positions and market conditions. Credit unions should tread carefully when selecting an advisory services firm or when transitioning to in-house management.
Thomas W. Manley