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How to tell if your advisor is delivering value

by | Feb 27, 2017 | SELF-PUBLISHED

Five key questions to ask

Horizons ETF Management, a leading Canadian provider of exchange-traded funds, recently announce that it will be cancelling the Advisor-class units (that is, units that pay a fee to advisors who recommend them) on its Canadian-listed exchange-traded funds (ETFs). That press release of itself didn’t attract a lot of attention, and was mostly of interest to commission-based advisors. But in fact, it’s a symptom of some pretty earth-shaking changes going in in the world of wealth management.

The new regulatory regime called the Client Relationship Model (version two), or “CRM2,” and the greater fee transparency that entails, is shaking up the financial advisory sector in a big way. Financial advisors are now required to disclose all fees as costs pertaining to client accounts. And for many advisors, especially those who have relied extensively on commissions and trailer fees, that will make for some uncomfortable client meetings. Under CRM2, advisors must clearly tell clients how much they’ve paid in trading commissions and fund trailer fees, as well as fees paid for administration and advice.

CRM2 does not require advisors to include costs embedded in individual products, such as MERs on mutual funds or exchange-traded funds (ETFs) – only commissions paid by such funds to advisors for selling their product. This is already having an impact on the market, as fund companies start to phase out classes of funds that pay trailer fees, as Horizons ETF Management has done.

So, for many clients of wealth-management advisors, the big question becomes, “What value exactly am I getting for those fees I pay you?” Many advisors have already adopted a completely transparent approach to fee and cost disclosure, including my firm, Castlemark Wealth Management, where this is one of our founding principles. But for many wealth management clients, what they pay and for what services remains a mystery. So here’s a top-line summary of how clients of wealth management firms can tell if they’re getting value for their money.

Does the advisor offer comprehensive financial planning? A competent advisor should gather necessary information at the outset, to determine goals, needs and priorities, identify and evaluate strategies, submit recommendations, agree on action, responsibilities and time frames, monitor and evaluate ongoing implementation.

Does the advisor develop a written investment management strategy? A written personal financial strategy statement identifies the client’s target, asset allocation, investment objectives, risk tolerance, and outline the steps needed to implement the strategy. In addition, the advisory firm should assist clients with, or provide background services for, the myriad administrative details involved with managing investment accounts, including account opening forms, asset allocation and risk tolerance questionnaires and follow-up, portfolio evaluation reports, portfolio reviews, assisting in arranging for deposits and withdrawals, and meetings with the portfolio managers.

Does the advisor provide an exhaustive portfolio-manager search? At Castlemark, for example, we routinely interview, conduct reviews of, negotiate with, and recommend third-party discretionary portfolio managers. We review each firm’s profile, history, ownership, and people through publicly available sources as well as our own private network. We extensively research a portfolio manager’s philosophy and style and drill down into a manager’s historical performance – something not always easily available for individual clients. We ensure clients receive top value for fees to portfolio managers, and we have always disclosed all fees fully on client statements. Perhaps most importantly, we continuously monitor managers through regulatory and industry listings to ensure they remain compliant with the regulatory framework.

Does the advisor do comprehensive portfolio and performance monitoring? This is an aspect of wealth management often overlooked by clients, mainly because it is intensely time-consuming, but it is critical to achieving long-term financial goals. An advisor who takes their profession seriously continuously monitors and reviews client portfolios for management style, compliance, investment policy, performance (including Alpha, Beta, and peer/benchmark comparison, service quality, administration, and tax-efficiency). Advisors should also provide ongoing analysis, research, liaison with portfolio managers, and regular reporting to clients, including quarterly performance reviews and semi-annual/annual client review meetings. Yes, it’s a lot of paperwork (for the advisor), but that’s what you’re paying them for! If you’re not getting that level of service, what exactly are you paying for?

Does your advisor offer a holistic planning framework? In addition to those all-important portfolio management services, a client will know they’re getting value from an advisor who ties in their investment plan with a comprehensive retirement planning strategy, an education planning strategy, a family lifestyle protection strategy (including assessing the need for life, disability, or critical illness insurance), and an estate plan.

© 2017 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice. Securities mentioned are not guaranteed and carry risk of loss.

© 2023 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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