Luis Requesens, Andes Wealth Management
Buenos Aires, Argentina
These types of crazy ideas most likely arise when a client goes out to play golf with a friend and the friend tells them that he had an amazing performance with this or that specific asset. Many times, they are the reflection of home biases (positive or negative).
The next day the client comes very excited wanting to buy the same asset. The reaction is logical, but our client must incorporate the following ideas
First, they don’t know what their friend’s risk profile is. They may have a vague idea of their ability to take risk, for example their proportion of financial assets over total assets, the flows generation in their main activity, their financial knowledge and age, among others. But they probably have no idea about their friend’s willingness or desire to take risk. In other words, their friend’s investment decision could be a good decision for them and not for our client if the profile between the two differs.
Second, our client does not know what proportion of the financial assets his friend has in that investment. Our task is to discourage these types of ideas when they break with the level of diversification desired for our client’s profile.
Third, an efficient way to easily discourage these types of ideas is to have a well-written, solid IPS (Investment Policy Statement). If the idea is contemplated by the investment policy it is evaluated, if not then it is not.
Fourth, in many cases these types of investment proposals come with liquidity restrictions. In some cases, performance differentials are only attributed to illiquidity premiums. This topic has to be well explained to clients.
Finally, if the idea exceeds the four previous instances, it must be evaluated. If the asset performed well above average, perhaps the expected performance for the future will not have the same pace. But if, after the valuation, it deserves its incorporation, the amount of money invested is assessed.
Atholl Simpson – Article: Citywire.com
