3 Reasons to Partner With an Advisor on Your Investment Portfolio

August 10th, 2018

strategy-8-10-18.pngAs rising short-term interest rates flatten the yield curve, the resulting squeeze in bank margins is leading executives to look in every nook and cranny seeking cost savings. But as bank management teams tenaciously put some vendor relationships under a microscope, why do the bond portfolio and investment management processes typically escape scrutiny?

Bankers often and instinctively evaluate the performance of a securities portfolio by considering investment returns in comparison to an appropriate benchmark. But hidden in the overall yield are many expenses associated with managing the bond portfolio. Because transaction execution costs are not visible as an expense “line item,” financial institutions often overlook these when it comes time to tighten the expense belt. Even when the portfolio catches the eye of senior management, the idea of bringing in an independent party to assist is rarely considered. While most banks see no issue with leveraging an outside partner’s expertise on items considered “new” and “non-core” (such as loan review, derivatives and hedging), they see managing the investment portfolio as “core” and are therefore naturally reluctant to consider working with an outside partner.

With the potential for significant savings, here are some reasons to keep investment portfolio management as a “core” function, while also working with an outside party to gain efficiency:

  1. Same Side of the Table - Regardless of your desire to keep the investment management process in-house, the numerous and diverse responsibilities shouldered by the individual carrying the dual titles of chief financial officer and treasurer make it essential to lean on someone for help. When the time comes to deploy cash generated from maturing securities and prepayments, the path of least resistance for the CFO is to depend upon the broker who is selling the bonds to assist in an advisory capacity. While brokers can provide valuable assistance with security selection and analysis, their compensation is difficult to quantify, as it is built into the bonds purchased as an undisclosed mark-up to the price. Rather than sitting across the table from you when it comes time to transact, the independent investment advisor sits on your side of the table, is accountable only to you, and is compensated in a clear and direct fashion. By overseeing the execution process for the purchase and sale of securities, the independent investment advisor can free up valuable time for the CFO, while ensuring that compensation for the brokers involved is reasonable, consistent and improves security yields. The advisor can also help establish a process for quantifying average annual transaction costs for the portfolio based on projected turnover and expected growth.
  2. Retain Strategic Control – Involving an independent investment advisor in the investment management process may feel like a sacrifice of control if the advisor works in a discretionary capacity. However, finding a non-discretionary advisor enables you to cede control of time-consuming, tactical tasks, while holding on to important strategic decisions such as asset allocation, duration and credit profile. Retaining an independent investment advisor on a non-discretionary basis alleviates concerns that a core function is being “outsourced.” Instead, the relationship can be viewed as a partnership that provides the bank with increased operating leverage, while leaving you in complete control of the process.
  3. Equipping Resource – Through daily interactions with a variety of clients and trading partners, the independent investment advisor brings a unique vantage point on the fixed-income markets that benefits you when it comes time to execute a bond purchase or sale. The breadth of experience of the advisor can also be leveraged to strengthen the skills of the internal team at the bank. As you grow, you may identify an employee you would like to groom to take on more treasury responsibilities. The advisor can serve as an educating coach, teaching best practices while performing advisory duties until the time comes to gradually hand over the reins to the new treasurer. This also relieves the CFO from finding time to be the employee’s exclusive mentor.

Whether out of concerns about pushing a core function out of the bank, or perhaps due to sheer oversight, many banks have not yet taken a close look at the investment management process as a potential source of earnings improvement. By partnering with an independent investment advisor on a non-discretionary basis, banks invite a resource to their side of the table while remaining in the strategic driver’s seat for all investment decisions. This can lead to meaningful savings, thanks to new-found price transparency, and can liberate the CFO to focus on other critical priorities.

bnewman

Bob Newman serves as a strategic advisor to community and regional financial institutions at Chatham Financial and Chatham Investment Advisors, a registered investment advisor providing independent investment management advice and security execution.