Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
"There are no requirements for managing billions of dollars, but before somebody can trim your sideburns, he or she has to pass some sort of test. Given the record of the average fund manager over the last decade, maybe it should be the other way around." – Peter Lynch, Beating the Street
How do you find a good adviser?
Although Peter Lynch’s comment is focused on fund management, the minimum requirements to become a licensed adviser are easier to get than in some other professions that have much less of an impact on your long-term well-being. In Canada, there are many people that are eager to manage your money but it can be difficult to find somebody that will do it well.
The best ones don’t necessarily drive posh cars, wear expensive suits, or have big corner offices. But they do share these three characteristics:
consistent returns and with reasonable risk
a focus on your success first, before their own.
Unfortunately, too often you can only learn how an adviser measures up after you have entrusted your money to them. There is no common rating system that lets you sort out the good advisers from everybody else. But there are three things you can -- and should – check before you choose an adviser:
After all, it’s your money that’s on the line -- not theirs. Make sure you’re putting it into the right hands.
1. Assessing an adviser’s qualifications
The fact that an adviser has the basic qualifications to work in the industry will not tell you very much about their skill level. To register as an adviser, he or she only has to meet the bare minimum qualifications to operate in the industry. So when you look at qualifications, look beyond the minimum.
What to look for:
Check that the adviser and their firm are registered and in good standing with industry regulators. Check now.
Find out if the adviser has any additional qualifications, such as chartered financial analyst or chartered accountant. It takes considerable work and expertise to achieve these and other professional accreditations. This means they can offer added insight and a richer perspective to you.
See if the adviser has made a commitment to ongoing professional development and skills development. A person who is committed to continuous learning will more likely serve you as a valued adviser, and not just sell you products.
Merely having experience in the industry does not make someone an excellent adviser. Experience may help an adviser understand and assess financial markets, but it does not guarantee the right focus on client returns. Nor does it necessarily teach advisers to focus on the long-term value of protecting their clients from the intense industry pressure to generate commissions.
The best advisers have learned, through experience, to make sure that costs are reasonable; that returns are fair; that recommended strategies and products are among the best available; and that clients feel comfortable and confident through good markets and bad.
What to look for:
Find out how long the adviser has been working in the industry and how long they have been working for this specific company. Learn about their philosophy and their company's investing philosophy.
Check that the adviser works with a broad range of products, not just one or two specialties, so they can help you find the right investments for your stage in life.
Interview a number of advisers before you choose one and ask them about their experience and investment philosophy. For instance, ask them what lessons they have learned over the years, and what they do differently today than they did five years ago (or when they started in the business). You can have a very interesting conversation with someone if you ask them about mistakes they have made and what they learned from them!
3. Assessing an adviser’s performance
It takes a long-term view and considerable emotional maturity for an adviser to balance making money for themselves with fair returns for their clients. As we will explore in future articles, most advisers are paid by commission -- and that commission often brings an incentive to make certain decisions.
The best advisers focus on returns rather than commissions.They understand the effects of fees and capital losses on client returns. They also know how to prepare clients for the volatility of financial markets.
Unfortunately, this type of adviser is less common than you think and takes a concerted effort to find. Make sure you:
Take the time to interview advisers to uncover their philosophy, their commitment to their profession, and the type of service that they will provide to you.
Make it clear to your adviser that you will monitor the relationship based on the relative performance of your portfolio against a reasonable benchmark.
Investors need to demand low-cost and market-comparable performance from their investments. This happens far too rarely today – and investors need to change this.
What to look for:
Make sure the adviser has good references and a demonstrated track record.
Check how the adviser has performed in both up and down markets.
Ask how long they have worked with most of their clients. Talk to at least three clients the adviser has worked with for five years or more.
Talk about how the adviser is paid. The best situation is where you and the adviser profit or lose together. Next best is an advisor who is paid to provide advice, but has no financial stake in the decisions you make. Neither of these are very common as the commissioned sales model is standard in the industry.
The problem with commission selling
One of the biggest enemies of long-term returns are fees. Commission selling can become problematic when it comes to fees because some of the most popular products are the most expensive for consumer because they are so lucrative for the salesperson.
For example, Canadian equity mutual funds with fees of approximately 2.5% are some of the most popular investment products in Canada. If these funds regularly provided returns that outpaced the Canadian equity market over the long-run, this strategy would make sense. However, this usually isn’t the case- only a handful of funds have outpaced the market consistently over the long run, despite the 1000s of funds (literally!) that are available.
Despite the fact that most mutual funds trail the markets in terms of return, you don’t often see full service brokers that recommend investing in an exchange-traded fund when a similar mutual fund is available.The adviser needs to get paid, and the mutual funds offer higher fees- even if it means generally below market returns for you. This is one example of how commissions create incentives for advisers to do questionable things for your portfolio.
Remember: advisers are important- but they can’t do it all
Investors need to be aware of what their advisers can and can’t do. An adviser can be great at some things, such as:
adding value with access to good research
offering tools and advice regarding asset allocation
helping you maintain investing discipline and focus.
In the early stages of a relationship they can help you through all of the documentation to define your investment type and asset allocation. They can help you access proven, low-cost managed and index products and help you screen out much of the bad product.
However, investors need to watch their portfolio closely and put pressure on their advisers to keep fees in line with overall returns. After all, just because somebody is qualified to do a job, or has experience, does not mean that they will behave in a way that maximizes your investment return. So learn as much as you can about an adviser before you put your hard-earned money in their hands.