Investment Baggage (or, too much of the same investments) is a common theme we see when a new client comes to SWS Partners. These clients have various investment accounts that all use the same types of investments across their brokerage accounts, retirement accounts, and company retirement plans. This can create investment baggage where the client unknowingly has concentrated positions and other distortions.
At SWS Partners, our philosophy isn’t that you shouldn’t be carrying around as many investments as you can, but have a thoughtful allocation of investments that is well-diversified for the long-term .
Anything extra is just baggage.
Within individual portfolios themselves, we often see concentrations as a result of investors working with brokers that have pushed products rather than an overall strategy. It’s easy to lose sight of your goals are when you’ve been sold products that benefit the person selling them more than they benefit you. When investments are sold to investors in this way, it can lead to too many or too few of the same thing and create the same problem: a lack of diversification in a portfolio.
In addition to concentrations in positions, portfolios that are driven by product sales often suffer from portfolio drift, the result of outsized gains or losses in positions that make the portfolio drift from the desired allocation. This can result in risk tolerances being abandoned. This is sub-optimal at best. We believe this exposes a material conflict of interest because the broker is motivated to reallocate the portfolio based upon commissions generated rather than keeping the portfolio in line with its mandate.
This approach to investment management has similar results that we seek to rectify with our new clients: security or fund concentrations, outsized exposure to similar asset classes, and disregard to the client’s risk tolerance, investment horizon or changes in their personal life. Any of these factors can have disastrous impacts for the investor. Much of the risk associated with security, sector, or other portfolio distortions can be easily managed with technology. This establishes strict guardrails that reflect your risk tolerance, or otherwise emphasizes the strategy, not a product.
With technology able to be more precise in portfolio management than any human, the client is rewarded with a better tactical execution of their portfolio strategy. This removes investment baggage to the greatest extent possible. Ultimately, this frees our wealth managers up to assist our clients with any changes to their risk tolerance, investment horizons, or respond to any changes in their personal lives.