By Mark Barnicutt on April 19, 2010
In a recent discussion with a client, I was asked the following question: “What Is Stewardship?”
A related comment to this question is typically, “Our organization has plenty of compliance rules and regulations that we follow. How does Stewardship differ?“.
My answer is always: “Compliance is about doing things right BUT Stewardship is about doing the right thing!” In other words, Compliance is a set of rules but Stewardship is about acting in the best interest of a client. An example will help explain the distinction.
As investment counsellors, we are sometimes asked by clients to create large portfolio weightings of certain types of securities into their portfolios. Many times, such requests coincide with “market tops” for various investment trends and an investor’s desire for excessive returns! Over the past decade, such trends have included technology stocks, income trusts, junior oil & gas stocks, hedge funds and structured products such as asset-backed securities. Back in the late 1990s — towards the peak of the technology bubble — we’d frequently receive requests/demands from clients to have at least 50% of their portfolios in technology stocks!!
Although there are not typically regulatory compliance issues with including such large overweight positions in private client portfolios (unless restricted by client wishes in their Investment Policy Statement), it’s not usually a good investment decision from a stewardship perspective. In other words, as we have discretionary authority in the selection of the securities for our clients’ portfolios, we consider ourselves to be fiduciaries, and, therefore, are operating from a position of trust and required to act as stewards of our clients’ wealth and act in their best interest. To us, this means that our goal is primarily about preservation of capital, with responsible growth, where required. If we were to include such large portfolio weightings in such ‘trend securities’, our compliance obligations would typically be satisfied (ie: We did things right!) as we had created a portfolio that met our clients’ desires BUT we would have failed in our Stewardship obligations (ie: We didn’t do things right!) as we created a situation of potential material capital loss, and as such, we did not act in our clients’ best interests — ie: preservation of capital with responsible growth.
The extent of regulatory compliance rules in the wealth management industry today is very significant — and will probably continue to grow — but no level of rules will ever replace the common sense approach of true investment stewards who manage client assets and ask the key question: “Have we done the right thing?“.
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