Let K⁴ Tell Your Story

by Dr. Felix Kleinstein

Whether you’re dealing with a high net worth individual or an institutional investment committee, you have to be prepared to explain how you select and evaluate mutual funds. Your command of this information may determine whether you get (or keep) the business. An easily explained and well-documented process can keep you ahead of the competition and saves you time short-run and long-run.

Clients don’t want lots of technical terms or details, they simply want to know that your selection and evaluation process is consistent, repeatable, and most importantly, reasonable. One of the benefits of using K4 Fund Selection is that it provides such a procedure and makes documenting it easy. Simple screening can narrow a universe of funds, but does not distinguish between survivors in the process. They all survived the screen, but which should you use and why? The K4 process yields a rank ordered solution based on all criteria evaluated together. The top-rated funds have more of the features you seek and are therefore preferable to the other, lower-scoring alternatives. Not only that, the funds are all rank-ordered by numerical score so you have a documented process for which is better and why.

You can easily document the steps you take to arrive at your recommendations by following the general format of the Model of the Quarter found also in this newsletter. Here are the basic steps:

1. First, state the fund qualities you seek and why they’re important. For example, you might want funds that are consistent performers with risk no greater than that of the market. You might also want diversified portfolios and experienced management. This isn’t hard; just state the qualities you seek in a few simple sentences
2. Lay out the factors you want to use, the relative weights you’ll assign them, and why. It’s helpful to use a table for the factors and weights, and include a sentence or two about each one. Don’t worry about defining each of the factors here; you can include a list of definitions later.
3. Describe how you arrived at the weight assignments, particularly if you used K4 Fund Selection’s Preference Exercise in which case you may want to say a few words about “conjoint analysis.” The User Manual has a description you can use to get started and the process is quite impressive.
4. Describe how you arrived at the weight assignments, particularly if you used K4 Fund Selection’s Preference Exercise in which case you may want to say a few words about “conjoint analysis.” The User Manual has a description you can use to get started and the process is quite impressive.
5. Explain how you use the rank ordering. Do you always take the fund at the top or are there other features you look for and compare?
6. Include a listing of your recommended funds as an example of your results.
7. Finally, provide the definitions of the factors and filters you’ve used and any disclosures you’ll need to use this document with clients. You will find the definitions in the User Manual glossary. You may already have the disclosure language on other documents, or if not, you can always ask compliance.

Contact Klein Decisions’ support if you need help in this process. We’ve assisted a number of clients with similar documents and can draw on that experience for your particular need. Once you complete these simple steps, you’ll have a clear, documented understanding of your mutual fund search and evaluation procedure. You can use it with clients, prospects, and within your practice.