How to pick the best financial advisor

As Charles Ellis highlights in his paper – The Winners Game –

 “… investment managers may or may not outperform their benchmarks, but if the investment consultant has not understood how best to meet the investor’s requirements, its game over. It’s actually the investment consultant and not the investment manager who has the greatest impact on outcomes and performance.”

How should private investors therefore select the best financial advisor? The answer is to make an appointment based on the proven value add which the financial advisor has implemented for their existing clients.

In simple terms, the role of a financial advisor is to provide investors with the following:

  • Putting an appropriate investment plan (i.e. an investment strategy) in place which suits the risk profile and performance expectations of the investor and then updating it at least annually;
  • Establish a robust and stress tested short, medium and long term strategy which includes an optimal strategic asset allocation as well as market and peer group benchmarks to meet the performance objectives within the predefined risk parameters;
  • Recommend and select superior investment managers with experience and skill in each asset class and to ensure that competitive cost structures are put in place;
  • Monitor the performance and risk of the selected investment managers and the overall investment strategy; and
  • Recommend changes of the investment strategy or selected investment managers where required.

Know what to look for

A financial advisor should be an investor’s long-term strategic investment thinking partner. Therefore, when selecting a financial advisor an investor therefore need to make a long-term decision.

Similar to when selecting an investment manager, an investor should appoint a financial advisor that is a registered Financial Services Provider with the Financial Services Board, has a long term proven track record, a well-defined investment philosophy and process, conducts top quality investment research and due diligence, applies independent thinking and has a highly experienced, stable investment team. A financial advisor needs to be quick on their feet and need to be able to provide investors with cost effective solutions.

It is important to note that investment advice is not only about defining applicable asset allocations, benchmarks and investment manager or product selection. It is about providing fully transparent and fair disclosure of any investment results and costs to investors, guaranteeing that all investment managers and products are assessed on a level and objective playing field. It must include investment education, in depth discussions and clearly defined outcomes for investors. The financial advisor must empower the investor to make high conviction and informed decisions.

Finding an exceptional financial advisor is not an easy task as each financial advisor is different in their approach and every business model will be different. Differentiation exists across a number of key areas including whether the financial advisor is independent and focus solely on investment advisory and wealth management or whether the financial advisor is part of a “one-stop-shop”, thereby offering as many services as possible to as many clients as possible and always pushing their own products. Most financial advisor offerings are simply a by-product of a larger company which actually focus on product development and which aims to sell those products via the financial advisor. Other key areas of differentiation are the quality of investment research, the calibre, experience and stability of the team, the conviction of advice, business passion and client service, to name a few.

Furthermore, investors should be sure to look for a financial advisor that espouses trust and operates with absolute integrity. These key characteristics will ensure a successful and long-term relationship to the mutual benefit of both the financial advisor and the investor.

Get practical

SO, IN PRACTICAL TERMS, HOW DOES ONE SELECT THE BEST FINANCIAL ADVISOR? 

Selecting an investment manager is all about the four “p’s” i.e. philosophy, process, people and performance. So, why should selecting a financial advisor be any different?

When evaluating a financial advisor, philosophy relates to the alignment of investment beliefs between the investor and the investment advisor. For example, is selecting active investment managers a winner or losers game?

Process is how the financial advisor goes about conducting proprietary internal research as well as qualitative and operational due diligences on investment managers, how such research feeds through into their recommendations and, finally, the provision and implementation of their best advice and the implementation of cost effective solutions.

People refer to the caliber and experience of the team and the retention of such expertise, the teamwork and the collaboration to produce the best investment advice.

BUT WHAT ABOUT PERFORMANCE? 

Financial advisors should be able to demonstrate their track records and whether they have consistently met their clients performance targets and outperformed their peers and within their defined risk budgets.

Investors should only consider companies, which have a very strong DNA and culture, i.e. a strong set of values and ethical behaviors, which form the way work gets done at the company. A strong culture, combined with an empowered and fully committed and highly talented and most importantly stable advisory and investment team should provide a good platform from where the company can provide investment advice.

Investors should also give preference to financial advisors who live and breathes their business and has a passion to look after their client’s interests. It’s not difficult to find these – simply assess the staff turnover at investment advisors and you’ll know which company’s offers more than a job. Like anything in life, someone who really enjoys what they are doing will be better at it than someone who consults merely as a job.

WHAT OTHER QUESTIONS SHOULD INVESTORS ASK A PROSPECTIVE FINANCIAL ADVISOR? 

Investors should most definitely request the basic information such as client and staff turnover as well as client and industry references to determine client satisfaction. When you ask about staff turnover, ensure that you also obtain information regarding the more junior and the back office staff turnover as well as may financial advisor firms have high staff turnover at these levels but they are never disclosed to clients. The financial advisor, who advises you, is only as good as the team that supports him.

An on-site due diligence at their physical offices will allow an investor to form a more accurate opinion of the financial advisor. Start by understanding their business model and how they handle, manage or avoid conflicts. Thereafter, focus on key areas such as the caliber of staff, the stability of the team as well as the quality of their investment research and the robustness of their due diligence processes. Also test the financial advisor in terms of their turnaround times. Many financial advisors have not yet developed an approach that facilitates quick decision-making. Many financial advisors may also have so many clients that they can’t move fast. Similar to large investment managers not being able to change their portfolios quickly so will financial advisors which service too many clients also struggle to adapt and change their investment advice and the implementation thereof fast enough.

Don’t focus too much time on investment manager and product selection, as discussions around investment strategy and costs are more important. The financial advisor should also be able to demonstrate a comprehensive understanding of all the risks to which you as the investor may be exposed to.

HEREWITH SOME EXAMPLES OF PRACTICAL QUESTIONS THAT CAN BE ASKED TO ANY FINANCIAL ADVISOR:

  • Define what objective investment advice means to you and explain how you aim to provide such to the investor?
  • Are you linked to any product provider such as a bank, a life insurer, an investment manager or a stockbroker? If so, explain how you manage such conflicts of interests? Outline any other conflicts of interest or potential conflicts of interests?
  • Provide a list of your competitive advantages and particularly the experience of your research and investment advisory team?
  • Provide proof that the track record is superior to the targets and the peer groups on an after fees basis.
  • Explain how you conduct your own internal proprietary research and provide examples of such reports. For example, provide your views on the inclusion of passive tracker mandates within a well-diversified investment portfolio.
  • Explain how you conduct your own proprietary quantitative and qualitative and operational due diligence process on investment managers and their funds and products and provide examples of such.
  • How many South African equity managers make up a well diversified equity portfolio and what are the optimal allocation to passive, enhanced indexation, fundamental indexation, benchmark constrained and unconstrained manager mandates?
  • Is selecting active offshore equity managers a loser’s game or can you select alpha producing managers with a high level of confidence?
  • Alternative assets such as hedge funds, private equity and infrastructure assets are becoming mainstream assets. Outline your experience and expertise in these fields of investing? How do you define “out of the box” thinking? Does an allocation to alternative assets offer an opportunity to diversify a portfolio?
  • Outline your approach to guiding investors to implement Responsible Investing within their investment strategy and whether you belong to any industry bodies such as UNPRI?
  • Successful investing will become a more difficult pursuit going forward than in the past decade. How does the prospect of rising interest rates result in the restructuring of your client’s fixed income portfolios? Will you be advising your clients to move away from benchmark orientated investing to dynamic, unconstrained and a more flexible multi asset approach?
  • Cash and money market assets may not always provide real returns. How do you advise your client to “sweat their assets more” in order to obtain real returns?
  • Explain the various levels of costs which the investor will incur i.e. investment advisory fees, administration fees and investment manager fees and provide a total fee.

Hopefully, engagement with the potential financial advisor on topical matters such as these will assist investors to gauge whether the financial advisor has the required independent thinking backed by thorough and quality research and due diligence and thereafter robust portfolio construction. It is of utmost importance to be assured that your long-term strategic investment thinking partner has the required expertise, experience and business ethics to service your requirements.

Challenge Accepted

Keep in mind that, like in any profession, financial advisors have to bravely conquer numerous challenges. The investor should be cognisant of these challenges and should engage with the financial advisor pro-actively on how they are managing these challenges. Some key challenges financial advisors faces are as follows:

  • Clients require advice that is based not only on a theoretical and academical basis but on proven investment management principles. Financial advisors that have investment management backgrounds has an advantage to meet more sophisticated demands, however, the pool of financial advisors which offer such experience, is very limited.
  • The onus is on the financial advisor not to miss tactical opportunities to better position their client’s portfolios. The explosion of ETF’s and tracker funds provide advisors with better tools to implement tactical asset allocation decisions. Much research needs to be conducted on this new and fast growing opportunity set.
  • There is a rising desire for alternative assets, like hedge funds, infrastructure assets and private equity. This requires financial advisors to have in-depth knowledge regarding such alternative investment opportunities.
  • The universe of products is always expanding. The universe of products in South Africa is not just the 1000+ regulated segregated portfolio offerings but also the more than 1000 local retail unit trust products that could potentially suit their needs. There is also a growing universe of smaller, boutique investment managers who should not be ignored by investors.
  • Balanced Tracker Funds have exploded on the scene. In less than two years there are now more than 20 such offerings, each with its own unique characteristics such as its Strategic Asset Allocation, benchmarks used, liquidity and fees. These funds could potentially be used as the low cost core of any portfolio, complimented by high conviction active and unconstrained investment managers as satellites. It’s not about active versus passive anymore, but rather how to combine active and passive strategies.

Conclusion

Finally, when selecting a financial advisor, it is essential that the interests of both parties are completely aligned. Implement a detailed and clearly defined service level agreement to ensure that you receive a premium, high conviction and timeous service whilst the financial advisor is adequately compensated for their value add.

As rightfully as the investor expects honest and excellent service, as important it is to compensate the financial advisor to remain focused and to empower the investor with the required edge to ensure that long-term performance objectives are met.

Why GraySwan Wealth?

At GraySwan we guarantee a high conviction and proven value add financial advisory service that offers our clients transparent value add advice that far outpaces the cost of our services. We do one thing and we do it well. Investment advice and wealth management for us is not a by-product of a large firm – it’s our core competency and we do it exceptionally well.

Clients require advice that is based not only on a theoretical and academical basis but on proven investment management principles. Advisors like us that have investment management backgrounds have an advantage to meet more sophisticated demands.

Our top track record across our clients is proof of our proven investment advisory process, which we have refined over the past two decades in the investment industry.

It’s however not just about performance and cost savings. It’s about great service, about urgency in implementing decisions and minimizing implementation shortfall, it’s also about doing the right thing and applying responsible investment principles in everything we do. Our clients receive a premium service.

We have not lost any financial advisors since the inception of our business and offer one of the most stable and most experienced financial advisory teams in the industry.


  Download the PDF version of this snippet.
Download