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Advisor Alpha: The Argument for Actively Managed Investments

by on August 18, 2013 7:37 AM

In investment jargon, alpha is the amount of value added by having a good investment advisor or following a particular successful investment strategy.

It is the measure between just putting your money in an index fund versus having an actively managed portfolio that performs better than the averages.

In this regard, you can measure the alpha for your portfolio by seeing how your money has performed versus a standard measure like the S&P 500 Stock Average or the Dow Jones Industrial Average.

Your portfolio might lag these averages in a given short term, but over several market cycles your advisor should be providing measurable alpha by avoiding the worst of the down (bear) markets and participating in a large part of the growth of the rising (bull) markets.

Portfolio management effort by your advisor requires discipline, patience, persistence and constant questioning of every investment transaction. No one has all winners in the investment game and competence in this effort requires admitting your mistakes with appropriate sales and allowing your winners to benefit the portfolio until they stop - and they all stop at some point.

I measure my worth to my clients by the performance I add to my clients' portfolios in comparison to the unmanaged market averages. As the academics will tell you, this is a very high bar to attain consistently.

Indeed, I do not measure up to this every quarter or year. Yet over the long run, I do have a good historical investment performance. Of course, one must remember that past performance does not guarantee future results. So there is no rest in the job for an advisor offering alpha; there is no resting on one's laurels.

Recently, I have considered another facet of advisor alpha that doesn't rely on relative investment performance. Folks with money are often busy doing other things in life. Among the philosophic set, the domain of money is just one of thirteen domains of permanent human concern.

So, most folks have a number of other things to be concerned about other than their money and investments. Advisor alpha in this regard is the time and effort saved by the investor when their trusted advisor handles this domain of concern for them.

It's like going out to dinner rather than preparing it at home. As I get older my "chef alpha" seems to get larger, because my wife and I are enjoying meals at restaurants more often than in our younger years. The value added by having a good restaurant serve us a savory meal far exceeds the cost in our estimation.

As I ponder the twilight of my investment career, it is rewarding to find that I am worth more than just my investment alpha. At our firm we have made our clients' lives a bit easier as we do our daily work of watching the markets, researching investment possibilities and then allocating funds to various investments and finally measuring the results and making the appropriate corrections.

We have also happily value-added the investment accounting, tax reporting, and coordination with tax preparers while keeping our clients and their families in the loop.

Having a career in life is all about effectively handling the concerns of others within the context of a trusting relationship. It is all about being of service and value to others. For me, it just doesn't get any better than this.



Dan Nestlerode was previously the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. He retired in 2015 after 50 years in the investment business. A graduate of Penn State University, Nestlerode became an investment advisor in 1965. He can be reached at [email protected]
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