The rationale for investment manager changes

Sometimes, WealthStep needs to change the investments (i.e. mutual funds) held within 401k plan portfolios, or WealthStep Direct (for individual investors outside of retirement plans) portfolios. Rebalancing and tax loss harvesting for taxable portfolios are ways to keep portfolios’ allocation in check and lower tax bills, but what happens when a specific investment manager of a mutual fund or other vehicles needs a change? How does WealthStep decide when to hire or fire managers within client portfolios? WealthStep’s Investment Committee follows a careful and disciplined process, drawing upon internal and external research to make this infrequent, but important, decision.

How investment managers are selected

Selection involves an institutional-style assessment that considers an array of quantitative and qualitative factors. Along with an investment manager’s/mutual fund’s stand-alone merits, the “manager structure,” or how an investment fits with other vehicles, is also considered, to serve the overall portfolio design goals. We consider the taxable or tax-deferred status of the portfolio as an additional measure.

An intensive research process is used to select managers in which WealthStep has high confidence regarding their long-term capabilities, based on their people, process, and performance. As a result, manager changes are not frequent.

When replacing investment managers

Eventually, however, manager replacements are necessary, and are generally driven by concerns regarding the same three P’s above:

People: Organizational changes, such as key personnel departures

Process: Significant investment philosophy or procedural changes, causing the manager’s results to behave differently than desired

Performance: While studies and our experience show that the best managers all have significant periods of weakness on the road to good results, and premature removal of a manager can harm performance, persistent and/or unexplainable under-performance relative to the fund’s peers and benchmark can necessitate a change.

While WealthStep’s manager research process is process-based, it intentionally avoids hard pre-established rules for hiring and firing. There is both science and art in the manager research process. Our experience and outside research shows that judgment is important to better long-term outcomes.