The Fiduciary Care Checklist

Last week’s Beyond Meat IPO was stellar as the Uber IPO was about to arrive. Then Uber flopped big time. And new tariffs with China sent markets straight down. Events like these can make you wonder what steps you need to take, if any, and which information is practical and useful. Fiduciaries think about this every day. Here’s a checklist for fiduciary care of a portfolio.

Classify every item in a portfolio

Classifying assets is more art than science. It’s not just what the asset is, but why it’s in the portfolio and what purpose it serves. Beyond the obvious (stocks, bonds, US, non-US) we classify by liquidity, probability of swings in valuation, expected cash flow, sensitivity to significant market changes, protection of principal and opportunity for upside over medium and long terms. Real estate gets classified too — for primary use, vacation use or purely for investment. In the end, each asset has to fit into the family’s wealth requirements, objectives and goals. An enticing IPO stock like Uber could be a good fit for a speculative buy and hold, but don’t bet your future cashflows on it.

Sort investments after classification

After classifying investments, a fiduciary knows how to group them for tax efficiency and liquidity needs. Certain cash flow generating securities could go into retirement accounts to escape current income taxes. High growth long-term stocks could go into personal and trust accounts. Assets with low liquidity like real estate and private equity should be balanced against liquid assets to ensure there is always enough cash available when it is needed. A fiduciary also knows in what order to withdraw capital when the time comes.

Know your cash flows

Cash flow can offset risk somewhat. Due to inflation, cash can never preserve capital completely nor can it be the sole source of return for a portfolio. The mere awareness of overall portfolio cash flow is a necessity and can be difficult to get a precise handle on. The right technology can help considerably.

Balance risk and return in bond or cash flow based portfolios

Bonds are favored for those who want reliable return of capital. Bonds represent an enormous range of options from Treasury to high risk corporate debt. It’s our role as a fiduciary to balance the risk of the investment (credit risk, interest rate sensitivity, opportunity cost, and liquidity) with the needs of the client. Treasury bills offer a decent cash flow currently between 2.2% and 2.6% with little to no risk. Certain corporate bonds can offer closer to 5% to 6% but they can be deceptive, too. Dan Rasmussen from Verdad Capital calls this “fools yield” — the cash flow is higher, but so is the risk. Like fool’s gold, fool’s yield is shiny and attractive on the surface but may be worth far less than one would hope.

Consider market cycles and market shifts

How likely are markets to perform as expected over the long term? The long term could be anywhere from 5-25 years and is influenced by the likelihood of a recession, a crisis or a major secular change all happening at once. One secular change was the appearance of very high inflation in 1979. Ironically, the appearance of very high inflation was a sign that stocks would go up 20x in 20 years. Something had to beat high inflation and stocks were the only assets capable of doing it. Fiduciaries are there to research how the long-term growth and the recession-crisis-secular factor fit together and what returns are reasonable.

Bring in trust and estates and tax expertise, and more…

Beyond portfolio care, our clients rely on us to bring in tax experts when they have a unique scenario or if their current CPA is retiring. When portfolios grow to considerable sizes ($5mm to $10mm to $25mm to $50mm), trust and estate expertise becomes increasingly important. Insurance is another component. We’ve built a network of people we trust and we know what questions to ask.

And last but certainly not least… your fiduciary should:

• Collaborate with enthusiasm
• Give time back to the client
• Act with flexibility in mind — significant changes in markets and in life do not follow the calendar
• Keep asking the right questions. The questions can range from “what do you want your money to do?” to “how do I educate my adult children about investments?” The answers vary over time and from family to family. A good fiduciary never assumes he knows how the client will answer the question.