Trust but Verify – Caveat Emptor

By Clifton McIntire; CIMA, CFP® and Lisa McIntire; CIMA, CFP® 

Most physicians and healthcare executives do not manage their own portfolios, or those of their office or medical foundations. Most are more comfortable using outside money managers to make their investment decisions. Just as the general public does not have the facilities, equipment, staff, or training to make medical decisions, physicians generally do not have the time, education, infrastructure or temperament, to make their own investment decisions.

The Style Search 

The search for the right manager(s) begins with creating a “want” list. What kind of a manager do you want? Let’s say you want to find a large cap growth manager. That narrows the field considerably from the start. You are looking for a manger that does research in and understands the field of large growth companies like Microsoft, Walmart, Pfizer, Google, and AOL-Time Warner.   Jim Cowperthwait, Managing Partner of NewBridge Partners, LLC in New York City, is a “growth” manager.  Cowperthwait sums up this philosophy with the statement, “Earnings growth drives stock prices over the long-term. Therefore, we invest our clients’ money in companies whose earnings are expected to grow at 20 percent per year.  Over the long term, this should result in portfolio growth of 15 percent per year.” The other main investment “style” is “value.” 

Value managers buy stocks at a discount to some perceived value.  Generally these stocks pay above market dividend yield, are selling below market price/earnings ratios, and have a low price to cash flow ratio.  Examples of value stocks would be Exxon, Philip Morris, Dupont, and Texas Utilities.  Jim Landau of Berkeley Capital Management in San Francisco, California is a value manager. Landau says, “We look for quality companies with a consistent record of dividend increases and a stock price that is undervalued.” Other styles include the following:

• Contrarian—invest in stocks that are out of favor or have little market interest
• Small Cap Growth—small growing companies with high capital appreciation potential
• Small Cap Value—companies that sell at a discount to some perceived value
• Market timers
• Asset Allocators
• Sector Rotators

Fixed Income Managers 

Managers in the field of fixed income also have a variety of styles. Some are managers of municipal bond portfolios such as John Mousseau of Cumberland Advisors of Vineland, New Jersey.  George Shaffrey of Morgan Keegan & Company of Memphis, Tennessee manages a portfolio of high yielding (average rating “B”) corporate bonds.  Madison Investment Advisors of Madison, Wisconsin offers management of U.S. Government Bonds.  To limit the field even more let us establish some minimum requirements.  To begin with, the performance numbers must be in conformance with AIMR (Association for Investment Management and Research); now CFA Institute, standards.  After that, limit your search to firms with the following characteristics: 

• Assets under management of at least $1 billion
• Organization with at least four principals
• Some independent research
• Length of time in business  (at least 2 market cycles)
• Consistent return performance
• Control of risk well defined
• Minimum account size within our reach

Software programs are available to screen the world of investment management and come up with a list of potential candidates. CheckFree Investment Services of Research Triangle Park, North Carolina has one of the best. Many others are available. Whether the Bank Trust Department, Private Money Manager or Personal Investment Consultant is being interviewed, here are a few of the questions that should be asked: 

• Can I get a sample of that report?
• What kind of performance measurement reporting do I get from you?
• What due diligence work is done by your organization?
• What investment/portfolio choices do I have?
• Who is/are the portfolio manager(s)?
• How experienced is the portfolio manager?
• How is he/she compensated?
• Are you showing me audited performance?
• How has the performance been? (1, 3, 5 and 7 years)
• Whose performance is it?  The same portfolio manager as five years ago?
• Have other key personnel changes been made?
• Will my account be a separate or commingled account?
• What are the total costs?  Does that include the following:  ü       [Custody of assets?   Management fee?  Trustee fees?  Transaction fees?  Transaction costs?  Distribution fees?  Termination fees?, etc] 
• Can I get the costs in writing with a statement that there are no additional costs?

Decision Matrix 

Now decide what’s important to you in a money-manger and weight each matrix or category. Here are four useful qualities to assess each potential money-manager on the same criteria to be as objective as possible.  These areas are organization, philosophy, performance and fit with your overall plan.  Decide how much weight to assign each of these areas and then rank each manager on a scale of 1 (lowest) to 4 (highest) for each manager. 

1. Performance: 

Like some medical P4P initiatives, after installing your manager(s) you must monitor the performance to assure strict and complete conformance with your investment policy statement. You need to compare your returns with standard indexes, your return objectives, consumer price index, and Treasury Bills. It is also important to compare your results with other investment managers with similar investment style. Let’s not forget the very important capital market line analysis, which depicts the risk we experienced for the return we received; or manager expenses and portfolio size.                   

2. Capital Market Line Analysis:

Quarterly in depth analysis of the portfolio is a must. Most institutions require a formal presentation from the consultant quarterly. Your money is certainly as important to you as the fiduciary responsibility is to them. Some consultants let the report always reflect the account from the beginning. The theory is that the more data that we put in, the more accurate the statistics become, but this begins to distort the performance after the fifth year, and data going back to 1940 is not relative to current market environments. Many reports exclude numbers more than five to seven years old. 

3. Expenses:

Expenses can play an important role in performance. You don’t hear much about expense ratios in an up market. If your account was up +28 percent, whether the expense was 3 percent or 1 percent doesn’t seem to make much difference.  But let the market decline and the portfolio with it for a year and we change our perspective. A 10 percent portfolio decline plus charges of 3 percent equals a 13 percent decline.  Now we need a 15 percent increase net of fees just to get even.  Basically you have four cost areas: 

• Custody—someone must hold the stocks and bonds, collect dividends and interest, prepare tax information for the government, issue monthly statements, and send checks.
• Commissions—orders must be executed, transfer securities into and out of your account, trades settled.
• Investment Decisions—the money manager must be paid.
• Monitoring Performance and Advice—usually an investment management analyst is engaged to provide this service as well as write the investment policy statement and prepare the asset allocation study.

4. Size:

Naturally, size makes a difference. For a stock account with a $200,000 total value, all of the above can be accomplished for annual fees between 2.00 and 3.00 percent.  An account with $1,500,000 in total assets part bonds and part stocks would pay annual fees between 1.25 and 1.75 percent depending on the ratio of stocks and bonds.  These are annual fees and are all-inclusive. Commissions, portfolio management fees, and statements check charges are all included.  One quarter of the annual fee is charged every three months.  Family related accounts are generally grouped for a quantity fee discount. Most all fee structures are negotiable. Some consultants prefer to use mutual funds with smaller accounts.  A charge of 1 percent per year for their service with a stated minimal fee is common practice. This does not include fees deducted from the account by the mutual fund (anywhere from .50 to 2.50 percent) or commissions paid by the fund managers for trade executions.   

Assessment 

Remember, when considering money management, be sure to understand the ultimate fiscal consequences and your own personal liability? Always be sure to use a fiduciary consultant and let the competition for your business begin. 

Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

• PRACTICES: www.BusinessofMedicalPractice.com
• HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
• CLINICS: http://www.crcpress.com/product/isbn/9781439879900
• ADVISORS: www.CertifiedMedicalPlanner.org
• FINANCE: Financial Planning for Physicians and Advisors
• INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
• Dictionary of Health Economics and Finance
• Dictionary of Health Information Technology and Security
• Dictionary of Health Insurance and Managed Care

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