Tim Farrelly

Building and maintaining high-quality investor portfolios requires a “robust, contemporary and defensible portfolio construction policy”, according to the speakers at the PortfolioConstruction Masterclass held today.

As part of the Financial Planning Association of Australia (FPA) 2010 National Conference, a Masterclass outlined the framework for decision-making in portfolio construction.

Graham Rich, publisher of PortfolioConstruction Forum, says portfolio construction is the “key to financial independence” and therefore involves a full appreciation of the issues and parameters affecting financial planners’ advice.

Rich says by reassessing key influences such as fees, taxes, objectives, benchmarks, returns and risk, planners will be able to articulate a set of statements that demonstrate what their business actually stands for.

“My suggestion is that financial planning, being the noble profession that it is, is only going to be successful by practitioners if their personal values are strong,” says Rich.

“Do you operate under … ‘situational ethics’ where whatever is appropriate at that point in time is what you deal with? Because if that’s how you operate in life, my suggestion is that you’re going to struggle with this notion of having a portfolio construction philosophy and policy that is compatible.”

Rich believes a portfolio construction policy sets “benchmarks for consistent and better decisions, increases business efficiency and effectiveness, mitigates risk and reduces stress for all parties and increases communication for all parties”.

Tim Farrelly, principal of farrelly’s Investment Strategy, asked delegates to consider whether their current investment goal process was to maximise returns or minimise risk.

“There is no right or wrong answer but you then start to ask, ‘What am I doing?’ and [begin to] look through your processes to see if this is consistent with my practices and matches my philosophy,” says Farrelly.

“If you are doing something different, it’s time to change your practices.”

Delegates were given case studies in order to see how two different but valid approaches could be applied to the same issue, opening discussions about how to implement advice efficiently and effectively.

The FPA 2010 National Conference is currently running on the Gold Coast and will end on Friday afternoon.