I'm somewhat skeptical when a managing director at the CFA Institute suggests, "I'd probably look at returns last."
That’s precisely what Tom Robinson was quoted as saying in this recent New York Times article on assessing your advisor’s job performance for last year.
But how else do you generate a report card for your advisor, if it’s not based on performance? Here are four categories you should be scoring your advisor on for 2014 (hint, returns is one of them). So get out your year end statement, your laptop and a cup of coffee and let’s do this thing.
Performance absolutely needs to be a metric you assess your advisor on. Don’t be mistaken and think that this means that the performance has to be the highest possible – that would be inaccurate. Instead, performance needs to be relative to the risk you’re willing to take and your portfolio is benchmarked against.
If you’re a conservative investor (or most of your portfolio is geared that way due to your stage of life, i.e. retirement income), you shouldn’t be benchmarking your portfolio’s performance against the S&P 500 or the Russell 2000, for example. Be sure the risks your advisor is taking match you, the client's, desired risk tolerance and financial goals.
Fees are important. Just like with any other major purchase you make, transparency in fees is also equally important. But how can you tell if your advisor is a lemon?
Part of your advisor’s job is to make sure that your investment fees are not exorbitant. That you’re getting returns in-line with your expectations – that line up with your risk equation and that you’re not paying a premium for.
Part of your job as a client, is to know how much you’re paying your advisor. Just because it’s traditionally taken some detective work to find out, doesn’t mean that you’re off the hook.
Your advisor knows how much they make off of you as a client, which means they know what they’re charging you. So why don’t you know how much you’re paying? And how does what you’re paying compare with what you’re getting?
Communication is important, but I’d argue that having a good contact management system, does not make a good advisor. Scoring a high grade goes beyond contacting clients X times per year.
Every client is unique and therefore has unique needs. Some prefer more handholding with regular updates and telephone calls. Others prefer to be contacted only when there’s a problem or something needs their attention.
Knowing which bucket you fall into, is part of your advisor’s job. Then, they should be delivering accordingly.
Reviewing your portfolio is a big part of the why behind the communication, but so are changes in the industry, the market and your goals and needs. You should be judging your advisor on the content and the quality, more so than the quantity of communication.
4. Service Level
What else they do for you? Does your advisor primarily manage your investments or are they offering a more robust service, like comprehensive financial planning?
Are they concerned about your protection needs/plan and whether or not you have a health care directive in place or a power-of-attorney? Or do they just spend time on performance or lack thereof?
Know what you’ve hired your advisor to do. What needs do you have as a client and how do they change over time? And how does what you pay them compare to the value you’re getting? How does your investment’s underlying performance play into this equation?
In literally everything else you buy there is a clear way to know how much you pay and what your return on investment is. If you buy a car and it’s a lemon, it’s obvious. This also holds true for houses, boats, cable, cell phones, etc. Communication and service level are also important metrics that should be measured when you give your advisor a grade for last year’s overall performance.
Before GuardVest launched its own tool to assess your risk, returns and fees, there was no easy or clear way to assess many of these metrics. It doesn’t matter if your portfolio is spread out across brokerage houses or platforms, you can pull all of your data into one place, to assess how your investments and your advisor are performing.
You likely just received your 2014 year end statement, what better time to give it a try and see how your portfolio (and advisor) match up. Let’s give them a grade today, shall we?