Chief Investment Officer, Sequoia Financial Group
Forget about hard knocks. Grass stains taught Russell Moenich a lesson that not only informed his career choice, but can help other registered investment advisors boost the efficiency of their investment committees. The takeaway: Find a better way to get things done.
As a teenager, it was time for Moenich, now chief investment officer at Sequoia Financial Group, to collect from one of his best lawn-mowing customers ― the one with the largest house and yard. Waiting in the customer’s den while getting paid, Moenich looked around and concluded that much more money was earned in this comfortable home than he was making by sweating outside. “I’m outside your window … to make $20, and you’re sitting inside here making investment decisions and just making lots of money,” Moenich recalls thinking at the time. He asked the customer what he did for a living — he was an investor. “Okay, I’ve got to figure this out” and find out how to become an investor, Moenich thought.
Moenich now leads the seven-person investment committee at Sequoia, a management firm with $3.5 billion under assets based in Akron, Ohio. In the same spirit of improvement, Moenich and his team created six principles guiding every investment meeting and decision at the firm.
These guidelines aren’t just platitudes. They’re rules that keep the firm on track ― even when opinions differ.
The rules were created over time as Moenich and the rest of the committee examined their “decision journal” ― notes kept from past meetings ― and distilled what worked best. Those best practices were codified and the six principles are printed on the first page of internal presentations to “keep them front and center in our decision-making,” Moenich says. They found that the firm’s quarterly investment committee meetings benefited. “As a result of these principles, we became much more efficient when we would need to make decisions as opposed to kind of going back and forth and stumbling around,” he says.
What are these golden principles that add efficiency to Sequoia’s decision-making?
Rule 1: Sequoia leads with financial planning, not investment performance.
When clients come to Sequoia, they’re looking for financial professionals to help them reach goals, not pick stocks, Moenich says. “We’re not trying to do anything heroic on the asset-management side,” he says.
Instead, Sequoia brings broad wealth planning expertise to clients’ financial needs to create a plan that aims to have a high likelihood of success. On top of asset management, Sequoia provides wealth planning, family wealth, insurance and institutional services.
Moenich sees this shift toward broader wealth planning as getting ahead of trends in the industry. Many advisors may need to transition toward higher value wealth management services as more of the asset management side of the business becomes undifferentiated or even automated, Moenich says. “The only way that I think firms ultimately in this market will be able to differentiate is with the value-add on top of asset management,” he says.
Rule 2: Getting the right asset allocation is more important than security selection at Sequoia.
Sequoia spends most of its time making big-picture asset-allocation calls ― choosing which mix of equities, fixed income and alternatives ― are best for clients, rather than picking individual securities. Moenich says in investing, 90% of success is showing up with the right asset allocation.
To that end, the firm created seven different model investment strategies to address the range of its clients’ risk appetites. These strategies come in three different wrappers based on client needs. There’s a portfolio built as a low-cost version expressed with exchange-traded funds for accounts of less than $1 million. There’s also a version that pairs an in-house U.S. large-cap portfolio with mutual funds holding foreign securities. Lastly, there’s a portfolio variant for higher-net-worth clients built with separately managed accounts, hedge funds and private equity, as well as mutual funds and ETFs.
Getting the asset allocation right helps keep portfolios aligned with client needs. “The committee spent a lot of time making sure that those seven strategies are correct and where we’d like them,” he says.
Rule 3: Superior risk-adjusted client results are more important than the pursuit of alpha.
Clients who sell securities at market bottoms suffer a permanent loss of capital, which Sequoia focuses on reducing, Moenich says. So rather than building portfolios with the aim of getting the biggest possible return, Sequoia focuses on assembling assets that will allow clients to draw income in good and bad markets. “We’ll give up some upside in order to protect in the downside and keep our clients invested through difficult times,” he says.
Rule 4: Low cost is always better than high cost.
Investor returns ― especially in fixed income ― are likely to be much lower in the next 10 years than they were in the previous 10 and 20 years, according to Sequoia’s market return assumptions. To help reduce this expected drag on returns for investors, Sequoia focuses on investments with low expenses “as one of the big indicators when we’re picking investments,” Moenich says.
The principle of avoiding high-expense investments pays extra benefits, too, by helping the firm sidestep investment fads that often don’t pay off, Moenich says. For instance, the firm has eschewed many types of alternative investments due to their high cost, most of which wouldn’t have added value for clients, he says.
Generally speaking, the portfolios Sequoia builds result in relatively low expenses for clients. The low-expense version of Sequoia’s seven strategies runs about 27 basis points, the mid-tier strategy costs about 50 basis points and the tier for high-net-worth clients varies since it’s customized for each client.
Rule 5: Having a process orientation for decision-making is vastly better than emotional reactions.
Emotions are the enemy of a solid plan, Moenich says. To safeguard against this factor, Sequoia puts “guardrails around all our allocations.” That means rather than making changes to portfolios based on hunches and a gut feel, the investment committee is held within ranges.
For equity allocations, that means keeping within 20 percentage points of the benchmark. And for fixed-income, duration must be within two years of the benchmark.
“These guardrails were put in place at the investment-process level in order to kind of protect us from ourselves,” Moenich says. “We don’t want to get totally out of whack and too far away from the intended strategy by letting emotion dictate that, so we have a lot of guardrails built into the models.”
Rule 6: Simple is better than complex.
Sequoia avoids exotic alternative investments since they’re hard for advisors and, more importantly, clients to understand. Most of these off-the-beaten path investments don’t add return or expense benefits in Moenich’s experience, either. The investment committee should look for simple investments that meet client goals, rather than seeking out complex ones. “Sticking with simple stuff, we think, will win the day.”
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