CKBlog: Standards

Tuesday, March 21, 2017

Advisor Alpha

In our industry, “alpha” is generally defined as an investment fund’s excess return relative to the return of a specific benchmark or index. If an investment fund has a positive alpha, it performed better than a particular benchmark for a specific period of time. For the baseball buff out there, if the average Center Fielder bashed 20 home runs last year but I notched 25, then I generated a home run “alpha” of 5 last year. For the foodies out there, if the average person eats 2 slices of pizza per sitting and I normally eat 6, then ... well, you get the idea.

As you might imagine, it is very difficult to generate alpha consistently over a long period of time (my pizza intake notwithstanding). But alas, alpha exists!

We spend a good amount of time identifying investment managers who have demonstrated the ability to generate alpha over reasonably long periods of time. But it is a rare breed indeed.  If we cannot locate such a manager in a particular country or sector, we will use low cost index funds to fill that slice of the portfolio pie.

Most of the industry obsesses over the search for investment alpha. While we do focus energy on investment performance, we find that often the greatest impact we have on our clients’ financial lives is when we deliver what is called “Advisor Alpha.”

I was first introduced to this concept while reading a white paper by Vanguard several years ago. The report went into great detail describing “how advisors can add value, or alpha, by providing relationship-oriented services—such as cogent wealth management via financial planning, behavioral coaching and guidance—as the primary objective of the value proposition.”

Their latest report on the subject can be found here: http://www.vanguard.com/pdf/ISGAA.pdf

This concept doesn’t merely exist in theory. I’ve seen it first-hand.

A client of ours, whom we will call Mary, sold her privately held business just before the financial crisis for over $25 million. It was impeccable timing. But as the financial world began to collapse, Mary was quite concerned about losing the wealth that she had spent decades building. Her concern was understandable as equity markets globally were in free fall, even AA and AAA rated bonds were selling off and large financial institutions were being “bailed out” or worse, going bankrupt.

Bank deposits were covered by FDIC guarantees, but at the time, it only covered $100,000 per deposit (it was later increased to $250,000). But Mary was sitting over $25 million! There were very few safe havens left. However, on October 14, 2008, the FDIC announced a temporary program which provided an unlimited guarantee on all non-interest bearing bank deposits. We called Mary, advised her to open and fund a non interest bearing checking account and she did. The impact was huge, but in delivering this “Alpha” we did not once speak about investment performance. Mary later asked us to manage her son’s $10 million trust. I doubt it had to do with the investment returns on the non-interest bearing checking account.

I get it, not all of us have multi-million dollar businesses to sell and $25 million to manage during a crisis. But whether it is developing and executing on a tax-efficient investment program, advising clients on how to help fund their grandchildren’s college education or helping clients manage their finances through real estate purchases and sales, we are attempting to deliver “Advisor Alpha” every day.

When my father founded CastleKeep 17 years ago, the firm was built on the principle of providing world-class, unbiased advice to our client families. Delivering “Advisor Alpha” in a thoughtful way through the years is what has helped us to grow into a six-person team, managing over $600 million in client assets with an eye towards $1 billion.

When we are referred to a potential client, it may be because of the investment alpha we have generated. However, more often than not the introduction was a result of the thoughtful interactions we’ve had with a relative or friend of theirs. If you would like to learn more about how we might be able to deliver “Advisor Alpha” to you, perhaps we could do so over lunch ... after the pizza is delivered of course.