We manage the majority of our clients' assets in managed investment accounts, invested in one of four models that we create and maintain ourselves in collaboration with the Commonwealth Recommended Investment list. The selection of a model depends on each client's risk tolerance, investment time horizon, and outstanding market conditions, among other factors. Switching between models is easy and can be done when warranted. The available models are as follows:
- Core/Satellite: Our growth model. The core portion uses indexed mutual funds or exchange-traded funds. The satellite portion uses actively-managed mutual funds.
- Defensive: A sector allocation model intended to focus on sectors that do better than other sectors when economic growth declines. For example, consumer staples rather than consumer discretionary.
- ESG: Utilizes funds specifically screened for environmental, social, and governmental issues.
- Passive: Utilizes indexed funds with low expense ratios.
Each portfolio offers the same selection of asset allocations, ranging from 100% bonds and cash to 100% equities, with 10% step increments in between for a total of 11 risk level options. We maintain discretionary authority to move between these risk levels without first informing our clients. We can also move between models in the same way. This allows us to make timely decisions in an effort to be proactive rather than reactive.
We have qualified (pre-tax) and non-qualified (after-tax) versions of each model. This allows us to quickly trade qualified accounts where capital gains are not an issue. It allows us to easily separate out non-qualified accounts where managing capital gains or tax-exempt interest may be an issue.
One of our guiding investment philosophies is that of variance drain. When two portfolios have the same average return on their investments over a specified period of time, the portfolio with the greater variance or volatility will have a lower compounding return on investment and as a result end with a lower account balance compared against a portfolio with a less-volatile history of returns. A specific percentage loss hurts more than the same percentage gain helps. For example, if you lose 50%, you must gain 100% to break even. Avoiding large losses is key to a successful investment strategy.
There have never been more choices in the financial services arena. With literally thousands of mutual fund providers, it sometimes seems that there are just as many ways to pay for services. If you are tired of trying to understand commission structures, contingent deferred sales charges, rights of accumulation, and the ever‑increasing multitude of share classes, perhaps you should consider a managed account.
When you use a managed account, you pay us a management fee based on a percentage of the assets you invest. From a cost standpoint, the greatest
advantage of this strategy is simplicity; you pay as you go. But there are many other advantages to managed accounts, including:
• You sit on the same side of the investment table that we do: “We prosper as you prosper; we suffer when you suffer.”
• You do not need to make an upfront load commitment in order to do business with us. Some investors prefer the pay‑as‑you‑go approach.
• You can terminate your relationship at any time without paying closeout fee‑based surrender charges.
• You can purchase no‑load, load‑waived A share, and NAV funds.
• You have virtually unlimited product options, including more than 5,000 mutual funds.
• You have the ability to rebalance your portfolio across different fund families.
• You can give us discretion without any concern for exposure to continuous commissions.
• You can transfer existing positions into a fee‑based account.
• You have the ability to harvest tax losses and stay in the market by purchasing exchange‑traded funds to wait out the Wash Sale Rule.
• You will receive enhanced quarterly investment progress reports and can potentially meet more frequently with us to review your portfolio and your financial needs and goals.
Managed accounts, like all investments, are subject to risk. A managed account can fail to meet its investment objective. Aggressively managed accounts, accounts that concentrate on more volatile investments—such as small‑company stocks—and accounts whose managers’ investment styles are suffering in the current market are likely to fall more sharply in value under certain market conditions than conservatively managed accounts. But they also have the potential to gain more in rising markets.
The partnership that exists between our clients and our firm is built on trust, mutual responsibility, and goodwill. Investors who entrust their finances
to us have every reason to believe that we will act with great foresight and care to pursue their goals and manage their assets.
Managing your assets requires discretion. This means that we are authorized to place trades in your account before notifying you. In the area of managed accounts, advisor discretion is common business practice. The reasons for this are twofold.
Discretion allows us to react quickly to changing market conditions and therefore place trades before waiting for feedback. More importantly, it empowers us to make decisions consistent with your financial goals without getting bogged down in phone calls. For example, when your portfolio deviates from its specific asset allocation due to changing market conditions over time, we must rebalance the portfolio in order to maintain its structural integrity. Such rebalancing efforts are aligned with your risk/reward profile and can be effective controls to minimize risk.
Discretion does not mean that we will make frequent and haphazard trades without contacting you. In fact, because of the way our contract is set up, we have no incentive to behave in this manner. Discretion means that if we are unable to or don’t have the time to contact you, we can place an intelligent trade. All trades executed in a managed account generate trade confirmations, which you will receive within a couple of days of the trade, making it easy for you to keep track of any adjustments we make to your portfolio. Of course, by the time you receive the trade confirmation, we may have already explained what was done and why.
Due to this discretionary authorization, managed accounts are subject to stricter regulatory suitability requirements than commission‑based accounts. Accounts are closely monitored to help ensure that unsuitable investments are not purchased and held inside the account.
We believe that discretion helps us to deploy our wisdom and experience to grow your assets. The precise use of discretion is a symbol of the trust between our advisors and our clients.
Commonwealth’s Mutual Fund Recommended List is one of many tools at your advisor’s disposal. But, like any tool, to be effective it requires a consistent, well‑thought‑out methodology that is rigorous in an analytical nature but receptive to the specific needs of the community using it.
To this end, the investment analysts at Commonwealth produce the recommended list as an indispensable service for advisors seeking to receive high‑quality investment research that will increase the time they spend with clients and minimize the time they spend doing intensive research. That’s because, to a certain extent, the research is already provided by Commonwealth’s in‑house research staff. Three principles drive the creation of the Mutual Fund Recommended List:
1. Independence and objectivity
Commonwealth’s analysts make all decisions independently and objectively. They strive to free themselves from all outside influences to add or delete mutual funds.
2. Investor needs
No list can serve or anticipate the needs of every investor. But a list that is carefully created and meticulously crafted can serve the needs of many. The recommended list is built on this premise. In general, the list is designed to offer something for every investor or, better yet, to meet the needs of the average investor.
Fund additions are made because analysts believe that a fund will stay on the list until it closes. “Funds of the Month” or even “Funds of the Year” do not receive considerable attention due to empirical research, which asserts that such funds are more than likely to underperform the market in the following year. With that said, for the recommended list to be effective, turnover must be kept to a minimum.
What makes Commonwealth’s recommended list different from lists offered by other firms?
1. Independent advice
It is never the analysts’ intent to pressure advisors to offer certain funds to their clients, especially if a fund does not meet our stringent selection requirements. Analysts recommend funds based on each client’s situation. This is also consistent with the analyst team’s position on being independent in all decision‑making.
2. Platform for additional research
Because the recommended list is geared for the average investor, it should not be regarded as the end of an advisor’s research needs. Granted, it is designed to be a timesaver, but this does not eliminate the need for your advisor to conduct independent research. Furthermore, because the list doesn’t mention optimal asset mixes or asset allocations, your advisor must conduct additional research or seek out additional counsel from analysts to decide whether any funds recommended will be optimal for your portfolio.
3. The art of the analysis
Though the recommended list is rigorously constructed using a combination of quantitative and qualitative research, it can still be construed as an artistic creation. Why? Because, the analysts make decisions on which variables to analyze, weigh, consider, or include in an analysis. This does not imply that a process does not exist. A process is in place. But the selection of inputs that is integral to the overall process and subsequent selection of mutual funds can be somewhat subjective.