What's the Real Cost to Shifting the Portfolio Management Process?

You know that your financial institution’s investment portfolio is critical to balancing interest rate and liquidity risk while providing balance sheet stability. The question becomes “Are we devoting enough time and resources to the investment portfolio?” and “Who can I trust to manage the investment portfolio?” Given your current process in place, you may also ask, “Is there a better, more cost-effective way to manage this process?” and “How much does it cost to change what we are currently doing?”

Ultimately, there are at least three methods to managing an FI’s investment portfolio, with pros and cons for each. Let us walk through the alternatives and answer the question, “What is the real cost to shifting our portfolio management process?”

Solution A: Managing In-House

Many community financial institutions (FIs) default to managing the investment portfolio in-house out of necessity. This responsibility typically lands on the Chief Financial Officer who already has an extensive priority list, and the investment portfolio often falls to the bottom.

There are certainly positives to managing the investment portfolio in-house. The FI has complete control over the process, and complete control over the people involved. Unfortunately, that is generally where the positive qualities end. One of the primary downsides of running a process this way is that the FI’s personnel, due to the sporadic nature of FI transactions throughout the year, are not in the bond market often enough to know where bonds are trading or yielding when trades actually take place. Much of the process becomes a guessing game in which management is left wondering whether or not their strategy was executed successfully. Also, as the investment portfolio management often falls to the bottom of the priority list as noted above, which means the process may not receive proper attention, and performance can be negatively impacted. Finally, the FI will need to invest significant dollars into analytics technology that it may not otherwise need.

All that said, what is the cost to manage an investment portfolio in-house? First, factor-in the portion of salary, benefits and training expenses of a full-time employee, typically at the CFO or Treasurer level. Second, a subscription to real time market information and the purchase of analytical software are critical for success. All in, that’s several hundred thousand dollars in additional expense to the FI.


Solution B: Relying on a Broker/Dealer

Chances are, you have had broker/dealers offering to help with your investment portfolio. If you entertained their calls, you may have questioned their intentions, motivations or even how they get paid. It may be enticing to rely on an outside party to take care of the investment portfolio for you. However, it can be tough to tell if they will represent your best interest or just focus on collecting a mark-up on the bond transactions.

Surely, there are redeeming qualities to broker/dealers. They have direct access to the market and, likely, considerable knowledge on market trends. If you are working with a dealer specifically, then you also have direct access to bond inventory. However, the compensation paid by the FI to the broker/dealers is not transparent and can create issues for your financial institution. You may be sold on the idea that buying bonds through a broker/dealer “does not cost anything”. Do not let that fool you! Broker/dealers include their compensation in the mark-up/down of the bonds bought/sold with the financial institution with whom they are doing business. Effectively, you will not know how much you are actually paying for their service. So, what is the true cost of relying on a broker/dealer? Mark-ups can range from 14 tick to over 1 point. However, there is a good chance that you will not know where your pricing falls on that spectrum.

If pricing transparency is important to you, there is another alternative to consider.


Solution C: Outsourcing to an Independent Investment Advisor

The third option is to work with an independent investment advisor, leveraging experienced investment professionals that are continually monitoring the market. A non-discretionary engagement with an investment advisor allows FI management to be completely involved in the investment management process, putting your mind at ease, while allowing you to focus on other strategic initiatives at the FI. You can also have access to market analytics tools that you may not have (or want to invest in) on your own. Due to the investment advisor being active in the bond market, your trade execution will be improved compared to the previous two options, which will have positive effects on interest income and net income. A good investment advisor will also inform and educate senior management on the process, credit considerations and on the bonds themselves.

The biggest downside of outsourcing to an independent investment advisor is relying on a third party. However, this downside can easily be overcome by maintaining constant communication with the investment advisor.

There are primarily two compensation structures for an independent investment advisor. One method is a fixed fee and the other method is a variable fee based on assets under management. The fixed fee arrangement is the preferable arrangement for a FI, as the service fee does not increase as drastically as the investment portfolio increases in size.

The cost of switching to an independent investment advisor varies by service provider and by how the investment advisor is compensated. A fixed fee arrangement with an independent investment advisor will generally be less expensive than managing the investment portfolio in-house, relying on a broker/dealer or using an investment advisor compensated by assets under management. You will not have to hire a full-time employee or invest in other expensive analytical software. You will not have to guess how a broker/dealer is being compensated, and whether or not you are overpaying for their services. You do not have to be concerned about the size of the investment portfolio. You could save hundreds of thousands of dollars, while formulating a strategic approach to the financial health and growth of your FI through the investment portfolio.



How do you choose which path to take? Rather than choosing an option solely based on cost, it is important to address the combination of factors that affect the long-term financial health of the FI. Managing the investment portfolio in-house provides great internal control over process and people. But this option overburdens employees who have other responsibilities, and limits the FI’s view into the market. Similarly, relying on a broker/dealer grants the financial institution direct access to the market, but leaves the bank vulnerable to the ulterior motives of the bond salesman.

For many FIs, utilizing an independent investment advisor who offers advice on a fixed fee and non-discretionary basis strikes a balance between control, market insight and cost efficiency. It allows management to improve trade execution which improves yield and ensures that the bond portfolio is structured considering the interest rate risk, liquidity risk and capital position of the financial institution. This can all be accomplished while management stays actively involved in the portfolio management process. Furthermore, the cost to manage the investment portfolio through an independent investment advisor compensated in a fixed fee arrangement can often be significantly less compared to the other two options. However, it is important to weigh these advantages against the size and in-house capabilities of your organization. Weighing your FI’s specific needs against the advantages and drawbacks of each model will provide a starting point for managing your FI’s investment portfolio in the most cost-efficient and strategically impactful manner.


Choosing a partner for your financial institution’s investment advisory starts with one key factor: a foundation of trust. As an independent advisor to over 160 community and regional banks, and with $3.5 billion in assets under management, Chatham Financial and Chatham Investment Advisors have established long-term, trusted relationships with its partners throughout the industry. Members of the Chatham team have sat in CFO and treasury roles at community FIs, and know what it takes to manage a successful investment portfolio.



Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit https://www.chathamfinancial.com/legal-notices/.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 18-0134

About the Author

Dave Sweeney

David J. Sweeney is Managing Director for Chatham Investment Advisors, an independent investment advisor. David spent fourteen years as a Principal at a big four accounting firm, and eight years in CFO and treasury positions at community banks, managing over $1 billion in investment securities, and over $1 billion in wholesale funding and asset/liability management process. He leads a team of advisory professionals with deep community bank experience.

Follow on Linkedin More Content by Dave Sweeney
Previous Article
How to Measure the Performance of Your Investment Management Team
How to Measure the Performance of Your Investment Management Team

Assessing the performance of those responsible for managing the investment portfolio can be difficult. Cons...

Next Article
5 Ways to Maximize the Value of Your Investment Portfolio
5 Ways to Maximize the Value of Your Investment Portfolio

Improving security portfolio yields can help to bolster total interest income earned, return on assets (ROA...


Subscribe to Chatham's Weekly Market Insights

First Name
Last Name
Company Name
Thank you!
Error - something went wrong!