Advisor Advice

Wealth management, like any other profession, has good advisors and wealth management firms and average ones. Below that are the “others”. How do you assess yours, and how do you avoid giving your hard-earned wealth to the “others”? Based on my experience, I have put together a list that you can use to assess your advisor and firm. You can also use it to evaluate other providers if you are not satisfied with your current one.

I have narrowed down the top ten topics to cover in Table 1. All good advisors and firms will happily provide answers to these. As we go through the topics in detail below, you will notice the words “chartered” and “certified” pop up frequently as professional qualifications are important.

Table 1

Advisor Assessment (#1)

Look for advisors who have attained a high level of specialized knowledge and experience. Qualifications such as a Chartered Financial Analyst (CFA) or Chartered Investment Manager (CIM) designation are preferred. These indicate that the advisor has a minimum level of experience and has completed the extensive course work. They have also put in the time and effort to pass a series of rigorous exams. Ideally, they should have at least five years experience as an advisor after achieving their designation.

What if the advisor doesn’t have one of the designations? Look for a relevant post-secondary education as well as industry training and education. Ten years experience as an associate or full advisor is the minimum I would look at. My philosophy is to let less qualified and less experienced people learn with other people’s money!

Client Capabilities (#2)

You can’t get to your financial destination unless you have a roadmap. Good advisors and firms will ensure you have a financial plan before you invest. If you don’t have a plan, they can usually do one for you for free. Ideally the plan is done by a person with a Certified Financial Planner (CFP) designation. If your situation is complex, good advisors will provide referrals to other professionals such as lawyers and accountants. And, to throw one more qualification your way, referrals to insurance professionals that have the Certified Life Underwriter (CLU) designation. For high-net-worth clients (>$500K or >$1M) , larger advisory firms can offer a lot of these services in-house for free or for a modest fee.

Make sure your advisor has the capacity to provide quality advice and service. Ask for the number of households they serve, the average account size, household turnover, and the maximum number of households they will service. If you are a smaller investor (<$500K) your advisor may have hundreds of households. If you are a high-net-worth investor, ideally the advisor has no more than 100-200.

Investment Intelligence (#3, #4, and #5)

Does your advisor or firm have an investment philosophy? Good ones will. They have developed an investment process and style that delivers on their clients’ goals. While there is no one right process or style, look for red flags such as a short-term investment horizon, a black box process, and high portfolio turnover.

From an implementation perspective, find out how your advisor determines your asset allocation (mix of stocks, fixed income, and alternative investments), constructs the investment portfolio, and how your financial plan is incorporated. Good advisors can articulate their process (which should be disciplined) and the underlying assumptions (which should be based on research). They should also be able to describe how they manage the investment risk in the portfolio through the asset allocation and portfolio management process, and how that risk is consistent with your risk profile. Ask them about their compliance process, as all advisors and their firms must have robust measures in place to minimize risk to clients and to meet regulatory requirements.

Portfolio Perusal (#6 and #7)

What resources does your advisor have to put together your investment portfolio? How much time do they have to do this, after taking into consideration their client load from #2? How many people are involved in the research, implementation, and monitoring of your investments? One or two people can’t do it all. But having more people doesn’t mean you will have better results. We don’t see the largest teams always outperforming the smaller teams. The team managing your money should have sufficient investing knowledge and experience (see #1 above) and enough people in-house or through external resources to cover the different markets in which you are invested.

Ask your advisor, especially if you are evaluating a new one, what a typical client portfolio looks like for a person with your goals and risk profile. Good ones will provide you a sample portfolio so you can see what type of investment funds and individual securities they invest in. If there are more than ten different investment fund holdings, that could be a red flag for a lack of investment focus or discipline.

Results Review (#8)

Look at the advisor’s investment results, after fees, over longer time periods such as 5 and 10 years. The results are usually compared to an appropriate benchmark, which is a set of market indices (such as the S&P 500 and S&P TSX) weighted in the same proportion as your asset mix. Ideally performance should also be reviewed over rolling four-year periods to see if the investments consistently outperform or underperform versus the benchmark.

Advisors with registered portfolio management firms should be able to provide you a performance history that is a composite of clients with a similar percentage of stocks in their asset allocation. Advisors with other types of firms should be able to provide you with a history for similar clients. Ideally the historical returns should outperform the benchmark, especially if your advisor claims to be an active manager. If their performance is better than the benchmark, check if the manager has taken outsized risks relative to the benchmark to get those returns. As I wrote about in A Balanced Perspective On Balanced Funds, it is hard for active balanced fund managers to outperform.

My ideal is to compare investment results, after fees, to a portfolio of low-cost indexed exchange traded funds (ETFs). The ETFS would be weighted the same as the asset allocation for the portfolio. This is an investable alternative to your current portfolio. Many portfolios I have seen underperform simple ETFs.

Service Survey (#9)

It is important that you listen to your gut on whether you like and trust the advisor. Good advisors will provide written commentary at least once a quarter along with your portfolio valuation and investment returns vs. the benchmark. Your advisor should communicate with you when there are major events in the market that affect your portfolio or there are significant company developments in one of your major holdings. If you are looking at a new advisor, ask for a sample of their communication and reporting.

Fair Fees (#10)

See what your all-in fees are by combining the advisor’s fee schedule with any other fees that may be charged within your fund holdings. Examples are management fees, operating expenses, and trading fees. As I outlined in Fair Fee Fare, advisors’ all-in fees for people investing less that $500K average around 2% and robo-advisors 0.7%. For high-net-worth investors, all-in fees usually start at 1.25% and go down from there as you invest more money. You should avoid advisors with fees significantly higher than these averages.

Advisor Advice

Now that you have covered off the top ten topics you can make an assessment. Are the fees you pay appropriate for the value of the services and results you are receiving? Remember that it isn’t about paying the lowest fees. It is about paying a fair fee for what you are getting. If you are happy, then all is good, if you aren’t, then go advisor shopping!

Invest Wisely,

Dave Schaffner, CFA

Principal, Wayfairer Capital Management Ltd.