How to pick the best Investment Advisor

As Charles Ellis highlights in his paper “The Winners Game” investment managers may or may not outperform their benchmarks, but if the investment adviser has not understood how best to manage and meet the investor’s requirements, its game over. It’s actually the investment advisor and not the investment manager who has the greatest impact on investment outcomes and performance and whether the investor retires comfortably.

How should Trustees or members of retirement funds or private investors therefore select the best investment consultant or financial advisor? It is simple. Avoid beauty parades and don’t make appointments simply based on the lowest costs or based on an established brand or “one stop shop”. Rather make an appointment based on the proven value add which the investment advisor has implemented for their existing clients.

In simple terms, the role of an investment consultant or a financial advisor (let’s call them investment advisors) is to provide investors with the following:

  • Putting an appropriate investment plan (i.e. an investment policy statement) in place which suits their risk profile and performance expectations 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 tactical asset allocation ranges 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 fair cost structures are put in place;
  • Monitor the performance and risk of the selected investment managers; and
  • Recommend changes of the investment strategy or selected investment managers where required.

Putting it shortly, investment advisors can be seen as investors’ global long-term strategic thinking partners.

Know what to look for

Similar to when selecting an investment manager, an investor should appoint an investment advisors 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, applies independent thinking and has a highly experienced, stable investment team. A good investment advisor needs to be quick on their feet and need to be able to provide investors with tailor-made solutions. Rather than finding clients for their off the shelf products should they rather be finding solutions for their clients.

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

A recent study, representing 91% of the entire investment consulting industry’s market share in the United States, by the University of Oxford found that, on average, investment consultants’ recommendations underperformed their benchmarks by about 1 percent. Selecting the best investment consultant is therefore paramount to the success of any retirement fund. An average investment advisor will provide below average results. If you want to pay the lowest fees then expect results that are below average. Finding an exceptional investment advisor is not an easy task as each investment advisor is different in his/her approach and every business model will be very diverse. Differentiation exists across a number of key areas including whether the investment advisor focus on asset consulting only or whether the advisor is part of a “one-stop-shop”, thereby offering as many services as possible to as many clients as possible. For example, there are only a handful of investment advisors which only providing investment advice and doing it well. Most investment advisor offerings are simply a by-product of a larger firm which actually rather focus on actuarial or employee benefit advice or who provides investment administration services. Other key areas of differentiation are the quality of investment research, the caliber and stability of the staff, the conviction of advice, business passion and client service,to name a few.

Furthermore, investors should be sure to look for an investment advisor that espouses trust and operates with integrity. These key characteristics will ensure a successful and long-term relationship not only to the mutual benefit of both the investment advisor and the investor, but also to the benefit of fund members.

Get Practical

How does one select the best investment advisor? It is simple. Avoid beauty parades. Rather conduct on-site visits to a shortlist of investment advisors’ offices and engage with them on practical issues. A personal due diligence at their physical offices will allow one to form a more accurate opinion of the potential candidates. Start by understanding their business model and how they handle or avoid conflicts. When conflicts of interests arise within the investment value chain it effectively means that the investor is paying to be on the receiving end of second best. 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. Also test the advisor in terms of their turnaround times. Many investment advisors have not yet developed an approach that facilitates quick decision making. Many investment advisors 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 investment advisors which service many clients also struggle to adapt and change their investment advice and the implementation thereof fast enough.

Don’t focus too much time on manager selection, as discussions around investment strategy are more important. The investment advisor should 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 investment advisor:

  • With regards to asset allocation, if one assumes that the next ten years will follow the path of the past ten years it will most certainly lead to suboptimal portfolio construction. How do you adjust your capital market assumptions to provide guidance to construct robust and well-diversified portfolios going forward?
  • Successful investing will become a more difficult pursuit going forward than in the past decade which was characterized by falling interest rates. 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 are not providing real returns. How do you advise your client to “sweat their assets more” in order to obtain real returns?
  • How do you define “out of the box” thinking? Does an allocation to alternative assets offer an opportunity to diversify a portfolio?
  • What is your view on “smart beta” or fundamental indexation such as RAFI? Does RAFI work in South Africa?
  • Do fund of hedge funds offer value or is a hedge fund investment platform or simply selecting single hedge funds a better bang for buck solution to build a diversified hedge fund program?
  • What are the total costs for investing in Africa, not only in terms of investment management fees but also all related transaction fees? Therefore, how much alpha must a manager produce before fees to yield any alpha after fees?
  • 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?

Hopefully, engagement with the potential investment advisor on topical matters such as these will assist investors to gauge whether the advisor has the required independent thinking backed by thorough and quality research. 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, investment advisors too have to bravely conquer numerous challenges. The investor should be cognisant of these challenges and should engage with the investment advisor pro-actively on how they are managing these challenges. Some key challenges investment advisors face are as follows:

  • Clients require advice that is based not only on a theoretical and academical basis but on proven investment management principles. Investment advisors that have investment management backgrounds has an advantage to meet more sophisticated demands, however, the pool of experienced and independent investment advisors which offer a proven value add business model, is very limited.
  • The onus is on the investment 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 but investors wishing to adopt the “Yale-model”, very quickly realize that they do not have the expertise to make such allocations. This requires investment advisors to have in-depth knowledge regarding such alternative investment opportunities.
  • The universe of products is always expanding. The universe of products for a retirement fund in South Africa is not just the 1000+ regulated institutional, segregated portfolio offerings but also the more than a 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 also 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 retirement fund, complimented by high conviction active and unconstrained managers as satellites. It’s not about active versus passive anymore, but rather how to combine active and passive strategies.

Conclusion

Finally, when selecting an investment 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 investment 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 investment consultant to remain focused and to empower the investor with the required edge to ensure that long-term performance objectives are met.

Why GraySwan?

At GraySwan we guarantee a high conviction and proven value add investment advisory service that offers our clients truly independent and transparent advice and finally in value add that far outpaces the cost of our services. We do one thing and we do it well. Investment advice for us is not a by-product of a large firm – it’s our core competency. Our top quartile track record is proof of our proven investment advisory process, which we have refined over the past 15 years in the investment industry where we have advised to most of the largest retirement funds in the industry.

Further, we only serve a handful of premium clients and they have all reached their targets and outperformed the peers and such with total transparency and low total fees and exceptional service. We are not asset gatherers, which finally provide a cut and paste service to their clients.

Our advisor to client ratio is by far the highest in the industry and that’s why our clients are top performers and receive a premium service. We have not lost any advisors since the inception of our business and offer the most stable investment advisory team in the industry.

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.

We don’t push products – we find solutions for our clients rather than finding clients to be pushed into internal products. Our advice is objective, independent and tailor-made to our clients needs.

All we have is our reputation. We’re in an industry were trust is everything. We bring no headline risk (badd press) or potential headline risk to our clients. Our peers have been in the press for the wrong reasons.

OUR FEES VS. INDUSTRY FEES

The industry buys on the lowest price but unfortunately that leads to investors not finding extraordinary quality, service and value add. If the industry demands excellence then we believe they must be willing to pay for it.

As proven, investment adviors has the largest impact on the final outcomes and performance of investors yet their income do not compensate them for such but rather investors are fixated on paying investment managers high fees for the potential of a small margin of outperformance versus the defined benchmark. In fact, as our research shows, the majority of active managers can’t outperform the market!

We compete on value add! We provide a boutique, premium, high conviction and world-class service to our clients and our value add is material and far exceeds the costs of our services. 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.

Looking forward, successful investing will become a more difficult pursuit than in the past few years. The focus going forward will be a renewed emphasis on risk management, asset allocation (especially Tactical Asset Allocation), more active rebalancing and to introduce alternative strategies (Hedge Funds, Credit, Africa, Emerging Markets etc.) that offer value and increased diversification benefits to investors. Make sure you have appointed the best investment advisor to help you manage your investments to meet your goals.

We’re not a normal consultant – we’re your strategic thinking partner.

We go the extra mile.

We’re more than a consultant – we’re your business partner.


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