By Warren Mackenzie on August 11, 2015
A question more and more investors are asking is: “Am I getting value for the fees that I pay my investment advisor?”
This is a great question, which first needs to be qualified before it can be answered. Do you actually know what your total fees are? Fees can include advisory, product, transaction, and custodial. Most investors do not know their total fees; and, few advisors fully disclose and break down their fees, especially the fees embedded in the products they sell.
If you are able to get a clear understanding of the fees, it is then extremely important to determine how you are going to assess value. Even this is a difficult process without a straightforward answer, as it has many dimensions to it.
We have found that an effective way to do this is by recognizing and accepting that your investments are simply a utility. Their purpose is to fund your current and future consumption needs and goals, nothing more.
Therefore, defining your goals and time horizons is the most critical step in the process of determining whether you are getting value. With these defined, it becomes clear what return requirement you will need. You can then assess, over time, whether the investment plan your advisor has prepared for you is actually helping you to achieve these targets.
Determining Investment Success Based on Your Goals
In order to determine whether you are receiving value for the investment management fees paid, you will need to be able to make these statements with confidence and certainty:
- My investment plan is allowing me to achieve my goals.
This means your portfolio should be measured against whether it meets your funding obligations, is protected against inflation, and focuses on long-term wealth sustainability. A goals-based benchmark addresses whether the portfolio is supporting the purpose of the money.
- The fees that I am paying are reasonable and fair relative to my overall return requirement.
If the fees are too high, you will have to take on more risk than is necessary to achieve your return requirement.
- The risk or volatility that I am experiencing is reasonable relative to my return requirement.
This is your risk-adjusted return and an important metric in understanding value. While not easy to determine, any good advisor will be able to provide you with this important statistic.
This type of approach makes complete sense, as it aligns your personal goals with your advisor’s contribution and the associated fees you have paid.
Advisors Are Rarely Transparent with Their Investors
While this process is logical and appropriate, it isn’t without its difficulties as investors rarely receive the performance information and statistics that would allow for this type of analysis. Unfortunately, in most cases, monthly statements don’t even show the rate of return – let alone a comparison with the proper benchmarks!
In 2016, we can expect some improvements to this problem when investment firms will be required to show the rate of return (as a percentage), but they will still not be required to show a comparison with the proper benchmark. Click here to learn about the impact of upcoming disclosure requirements in CRM Phase 2.
Investors need to take responsibility for their own financial success. They should demand that their advisor provide them with:
- An Investment Policy Statement which explains the investment strategy relative to their goals and funding obligations.
- A goals-based benchmark with an investment strategy designed to achieve those goals.
- A quarterly report that compares actual results with the goals-based benchmark and the investment strategy employed.
With this information, investors will be able to better ascertain whether their advisor is adding value.
It makes perfect sense to delegate the management of an investment portfolio to a financial advisor. But this only works if you demand to see performance results compared to the proper benchmarks that are aligned to your journey in life – so you can easily determine if your advisor is adding value.
If you delegate decision-making to an advisor but you don’t compare results to the proper benchmarks, then you fail the ‘wise investor test’ and you shouldn’t be surprised if your investment portfolio underperforms!
>> HighView is an experienced boutique investment counselling firm for affluent Canadian families and foundations. We would be happy to discuss our transparent fees and goals-based investment approach with you and your professional advisors.
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