Outsourced Chief Investment Office (OCIO):

An Outsourced Chief Investment Office is a term used to describe an investment service-model whereby an outside firm manages the day-to-day investment decisions for a portfolio. This can be contrasted with a “nondiscretionary” model, where an investor typically has the resources and expertise to review and pre-approve all changes to their portfolio.

Harpswell can serve as an outsourced chief investment office for our clients. We utilize our expertise, infrastructure, technology and resources to provide portfolio strategy and manage your daily investment operations, paperwork and policy implementation. We bring our experience with institutional asset management and the best-practices of in-house investment offices to our client’s day-to-day portfolio decisions. Using the portfolio guidelines you provide, Harpswell’s team makes the daily decisions on matters such as manager selection/termination, asset allocation and portfolio rebalancing. This service model works well for our clients who want to focus on establishing or maintaining their portfolio goals, but need an experienced team to implement these goals.

Investment Banks:

An investment bank is a large financial institution which performs a variety of services and manages significant financial transactions. The types of transactions typically handled by investment banks include: underwriting; acting as an intermediary between a securities issuer and the investing public; facilitating mergers and other corporate reorganizations; and acting as a broker and/or financial advisor for institutional clients. Some investment banks specialize in particular industry sectors and many also have retail operations that serve small, individual customers. Investment banks also have financial products to sell to customers.

Traditional Investment Advisor:

The “old model” of investment advice consisted of a broker calling clients with stock ideas. This model often incorporated high commission fees and inadequate diversification. Harpswell thinks that its model of serving as our client’s objective partner and constructing a balanced portfolio of carefully researched active managers and low cost “passive” funds makes sense for many investors, particularly not-for-profits. It is where we see the industry heading and we are pleased to offer these best practices to our clients.

Mutual Funds:

Today, most stock market participation comes through mutual funds. A mutual fund consists of pooled assets with no tax considerations to any single holder of mutual fund shares. An investor cannot ask a mutual fund manager questions regarding risk, return or strategy with respect to their individual investment goals and liabilities. As a Registered Investment Advisor (RIA), Harpswell can provide specialized investor services that mutual funds cannot.

A Registered Investment Advisor (RIA) manages the assets of high net-worth individuals and institutions. An RIA must register with the Securities and Exchange Commission (SEC) and the states where they operate. As an RIA, Harpswell can create portfolios using individual stocks, bonds and mutual funds. We can also cut down on costs by using a mix of funds and other investment vehicles to maximize value for a particular client.

College Endowments:

Endowments represent money or other financial assets that are donated to a non-profit (such as universities or colleges) and are meant to be invested to grow the principal and provide additional income for expenses and future investing. Often an endowment is structured so that the principal amount is kept intact (or partially released each year), while the investment income is available for use. The total value of an institution’s investments is often referred to as the institution’s “endowment” and is typically organized as a public charity, private foundation or trust.

Academic institutions, such as colleges and universities, often maintain an endowment fund that finances a portion of the operating or capital requirements of the institution. In addition to a general endowment fund, each university may operate restricted endowments which are used to fund specific areas within the institution. Most endowments have guidelines stating how much yearly investment income can be spent. For many universities, this amount is 5% of the endowment’s total asset value.

College Endowment investing:

Typically, endowment funds follow a set of long-term guidelines dictating the asset allocation that will yield a targeted return without taking on too much risk. Most endowments are run by professionals to ensure the investments made are in line with the institution’s policy allocation.

A college endowment needs to generate returns sufficient to take care of yearly withdrawals without dipping into principal. Also, to preserve the real value of its principal, a part of the return is also used for augmenting the principal to take care of inflation.

Since endowments can choose investments with longer maturity periods and high minimum investments, they can often generate better returns than traditional stocks and bonds. For instance, a large endowment can lock-in billions of dollars for a longer period in a less efficient market to achieve higher profit opportunities.

Family Office:

A family office is a private wealth management firm that focuses on very high-net-worth individuals and families. This type of firm differs from a traditional wealth management advisory firm in that they manage most or all of the finances and investing of an affluent family. For instance, family offices may handle budgeting, insurance, charitable giving, family-owned businesses, wealth transfer and tax services. Such an office utilizes a team of professionals from the legal, insurance, investment, estate, business and tax fields to provide the needed planning and advice. Most family offices combine asset management, cash management, risk management, financial planning, lifestyle management and other services.

IPS:

An Investment Policy Statement (IPS) is a document which establishes guidelines for an investment portfolio. It specifies the portfolio’s investment objectives and governs its investment practices. An IPS will also include accountability standards used for monitoring the portfolio’s performance and for evaluating managers.

An IPS is a crucial document for an investor because it is a commitment to a disciplined investment plan and it provides a structure to check the portfolio for compliance with established goals, priorities and restrictions. Harpswell can work with you to build an IPS or review and revise your existing IPS. Developing a sound IPS requires a good deal of thought, understanding of how the market works and a familiarity with investment principles and practices.

For an investment committee acting as fiduciaries for a fund, trust or endowment, an IPS is an important blueprint for the activities of the committee and any other persons to whom they delegate investment management responsibility. It helps to ensure that the investment policies and practices for the fund, endowment or trust are responsive to the anticipated financial needs and risk tolerances of the institution. An IPS will often define the role of the investment committee, the short-term and long-term goals of an institution or investor and the investment objectives and distribution policies the committee should follow.

Other important components of an IPS often include restrictions (if any) on types of investments, procedures for changes to the IPS, a spending policy, an asset allocation policy, a diversification policy, a set of portfolio rebalancing procedures, and a formal process for monitoring the portfolio’s performance against its investment objectives. A good IPS will also include asset allocation and targets. Harpswell can help ensure your IPS works for you and is helping you meet your goals.

Benchmarks:

A benchmark is a reasonable standard against which performance of a portfolio or particular investment is measured. Benchmarks can serve as a tool for our clients to establish objectives with us. Together, we can arrive at the proper benchmark with which to compare the portfolio’s performance and then Harpswell can make investment decisions with the benchmark in mind.

Commonly used benchmarks include market indexes, such as the S&P 500, the Russell 2000, the Dow Jones Wilshire 5000, Barclay’s Capital Aggregate Bond Index and MSCI All Country World Index. An index can track the performance of a large asset class, such as all listed stocks, or a more limited market sector, such as industry-specific stocks. LIBOR is a widely used benchmark for short-term interest rates and the Fed Funds rate is a benchmark controlled by the Federal Reserve Bank. A benchmark could also be another portfolio, mutual fund or pooled account.

Indexes represent a passive investment approach and can provide a benchmark to measure the performance of an actively managed portfolio. An appropriate benchmark should reflect the portfolio’s investment goals and strategies as well as the expectations for returns. Comparing a portfolio to an inappropriate benchmark could lead to misleading results. To track the performance of a particular investment, we should choose a benchmark that tracks similar investments. For instance, a comparison of a stock’s performance to the S&P 500 is a comparison to large U.S. company stocks. The Russell 2000, by contrast, measures small-company stocks and the Dow Jones Wilshire 5000 tracks all listed U.S. stocks. Furthermore, a portfolio should be compared to its benchmark over an extended period of time. Benchmark-based comparisons are a standard part of Harpswell’s service too, and communication with, our clients.

Fiduciary:

A fiduciary is a legal term that carries with it ethical responsibilities and the highest legal duty one party can have for another. A fiduciary is a person who acts on behalf of another, owing them the legal duties of good faith and trust. When a person accepts a fiduciary duty on behalf of another party, he or she is ethically and legally bound to act in that party’s best interests and to avoid any conflicts of interest.

A fiduciary generally manages the assets of another person (or group of people). Money managers, financial advisers, bankers, accountants, executors, board members and corporate officers can all be considered fiduciaries. The fiduciary is expected to manage the assets for the benefit of the other person, rather than for his or her own profit, and he or she cannot benefit personally from the management of these assets.

Harpswell is honored to serve its clients as a fiduciary. As a Registered Investment Advisor (RIA), Harpswell is bound to a fiduciary standard that was established as part of the Investment Advisors Act of 1940. The Advisors Act stipulates a duty of loyalty and care, and adherence to this Act means we put our client’s interests first throughout our relationship. It also means that we must do our best to make sure our investment advice is made using accurate and complete information, that we avoid any conflicts of interest and that we seek to execute all trades with a combination of low cost and efficiency. We also share fiduciary responsibility with any investment committee with whom we work.

Some, but not all, financial advisors are fiduciaries. Non-fiduciaries are held to the “suitability standard,” a lower standard of care. The suitability standard does not require advisors to put their clients’ best interests before their own and they do not have to avoid conflicts of interest. Instead of having to place his or her interests below that of the client, the suitability standard only details that the advisor has to reasonably believe that any recommendations made are suitable for the client. A broker-dealer is an example of an advisor who is governed by the suitability standard.

The way an advisor is compensated can dictate whether they can assume a fiduciary role. Only an advisor who is compensated through fees or is fee-based (a combination of a flat fee plus commissions) can be a fiduciary. Non-fiduciaries can be commission-based (or fee-based). Commission-based advisors are paid from the sale of investments or the sale of a product. They may also collect a percentage of the assets a client invests or be paid per transaction. A broker-dealer is usually compensated through commission and their duty is to their employer (the broker-dealer), not necessarily the client served.