A recent landmark study called 'Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry' (Harvard Business School, 2006) has one big lesson for all investors: even if you are using a full service adviser, you still need to track your investments.
This exhaustive study found that of the participants investing in mutual funds, people working on their own made more than twice as much as those who used advisers.
Time to fire the adviser? Like all things, it isn’t that simple. Time to be more vigilant as a consumer? Definitely. It’s the only way you can be sure your adviser is producing healthy returns at a reasonable cost.
Diagnosis: Poor adviser practices may be costing you money
What the study found was that common adviser practices didn’t add value to the average investor’s returns. These included:
- Excessive trading, chasing higher returns
- Market timing
- Trying to pick the next star mutual fund or wrap account
- Risky asset allocations
- High trading, product and account costs.
In fact, these practices were all shown to reduce rather than improve returns.
But for most of us, advisers do all the work we don’t want to — and there’s definitely value in that. So how can consumers get even better value — and avoid the pitfalls of poor advisers? Pay heed to the following warning signs.
Top seven symptoms of a poor adviser
Frequent portfolio changes. Once you have the right asset allocation, there should be little reason to change it. With the exception of periodic rebalancing, it should work through good markets and bad. Modifications are fine, but wholesale changes may signal a bigger problem — like an adviser changing course to put money in their pocket, not yours.
Pressure to invest in new products. Be wary of advisers who want to keep you chasing the next big new product. New products generally have no track record and likely come with high costs. If you use managed products or index units, stick to proven ones where the cost is in line with the potential returns.
Stock trading. Very few professional managers (such as mutual fund managers) trade well enough to beat a benchmark. Meanwhile, advisers have far less time, resources, or training to be good at this. And because most investors don’t get information about their total returns, it’s hard to tell if trading is a benefit for you or the adviser.
No return calculations. How can you tell if you are getting value?
Frequent capital losses. This refers not just to a drop in the value of your investments, but where you are regularly selling a significant portion of your portfolio at a loss and moving on. This is not a normal part of investing. It means that your portfolio has the wrong products and/or your asset allocation needs to be changed.
Too much contact. Advisers call to generate commissions, not to socialize. Hot stock? Market rising? It is all just chasing returns, a practice that can reduce your returns by up to 80%.
No contact/unexplained absence. Much cheaper than too much contact, and probably better for the long-term investor — but then why pay for it?
So how can you avoid these pitfalls and make sure your relationship with your adviser stays healthy? First, ask for your return calculations from when you started working with the adviser to today. Compare them with a relevant benchmark. Then get an estimate of your annual costs. If the returns are drastically lower, and the adviser isn’t willing to make significant changes in the way they work with you, it may be time to drive on.
Watch this video of Ted Rechtshaffen, President and CEO of TriDelta Financial Partners, with Rob Carrick from the Globe and Mail discussing good and bad financial advice.