Saturday, June 28, 2008
I can remember playing around as kids with my brother and sisters. Our general rule was "it's not a lie if your fingers were crossed when you said it". Of course, as kids our little white lies did not have the power to destroy wealth or mislead strangers. It was more likely to involve who took the last cookie or who left the milk out.
As we read through the tangle of information and dis-information from those selling securities, the little errors of ommission or implied information becomes a much bigger risk to investors.
A great example was exposed in the recent article by Rudy Luuko in the Toronto Star this week. For those that follow Mutual Funds, Mawer has been a great company that delivers on its promise of quality investing at a reasonable price. While many firms have partnership agreements, one of the Mawer partners sells what is basically the same fund as Mawer sells, but at a much higher MER. That higher management expense ratio funds a bigger trail of commissions back to the advisor. So once more the advisor has a choice: I can sell you the Mawer funds directly from Mawer at a low investor cost, or I can make a big commission by having my client buy the same fund through a partner firm. Hmmmm, I wonder how the disclosure works on this sale.
My guess is that the advisor crosses her fingers and says this is a great company with a great track record and maybe just forgets to mention the investor can buy the fund a lot cheaper if the agent looked past self interest and focused on wealth building for clients. For those who think maybe this is an isolated situation, please refer back to the sale of DSC style funds. The concept is the same. WHAT THE INVESTOR DOESN"T KNOW DOES HURT THEM!
Tuesday, June 17, 2008
One of the most common questions I receive is "what clues are there that I might have a bad advisor?". That is inevitably followed by the question "what is it costing me?". The answer is that bad advise may cost you a few dollars in fees and a few dollars in lost performance during a strong market, or it may cost you a substantial portion of your portfolio and a lot in fees in a soft market, or it may cost you your retirement lifestyle, your savings and your hard earned retirement in a tough market. The above is not a scare tactic. A bad advisor becomes readily apparent in rough markets when earlier decisions made in a strong market are exposed to the negative market forces. When investors take the "flight to safety" you will quickly know if you are holding "safety" or excessive risk. Warren Buffet expresses this concept by stating "only when the tide goes out can we tell who was swimming without a swimsuit". In investor language that is what is known as "naked risk exposure". Lessons are very expensive for investors who discover that their advisor is a great talker but not much of a portfolio architect
The below link to another Ken Hawkin article may help you self diagnose some challenges in your own situation.
The Cost And Consequences Of Bad Investment Advice
by Ken Hawkins
Many investors still rely on their investment advisors to provide guidance and to help them manage their portfolios. The advice they receive is as varied as the background, knowledge and experience of their advisors. Some of it is good, some of it is bad, and some is just plain ugly.
Wednesday, June 11, 2008
ADVISOR DILEMMA, THE FEE QUESTION
One of the big challenges for an advisor is how to answer the question, what are your fees?
The question is a key one for investors because the way the question is answered tells a lot about how you will be treated as a client!
We have talked in the past about the variety of ways in which fees are charged. I want to state first thing, fees are necessary and you will pay them one way or another. The best of money managers and the worst will all charge fees. The best of course earn the fees they charge and it becomes a win-win situation. But lets get past the fact that fees are a given. Lets talk about how advisors respond to the question.
First Example: In a recent industry magazine I read a letter from an advisor who stated with conviction that his clients did not care for the details on the fees as they were netted from performance which is the bottom line measure for an advisor.
I would challenge that viewpoint by extending the logic to everyday transactions. Assume you were buying a car and wanted to know what you were paying above list price. That tells you how much the dealer is earning on the sale and allows you to decide if it is reasonable. It may not change the price offered, but it provides the buyer with disclosure and an ability to compare dealers. Similarly, if you hired somebody to paint a house you would want to know the cost of the supplies and the cost of labour so you could adjust costs as needed (faster painter or cheaper paint).
Another challenge to the “big picture” defence is the fact that performance numbers are excluded from most statements. If you can’t get pure rates of return or benchmark comparisons then the ability to measure the advisor’s net value is lost. Of course that may be the real intent.
Second Example: Advisor’s often are paid via a combination of up front sales commissions and trailers. Again, let me say that that is not necessarily a bad thing. The commissions are generated from the fund company for the most part and are not disclosed on an individual investor basis. Advisor’s often state that the client is made fully aware of the Management Expense Ratio (MER) on funds purchased, which discloses the fee the client is paying. That is indeed true. It does not however enlighten the client as to how much of the MER is given back to the advisor. That presents a challenge for clients who might explore different options that pay less to the advisor and have lower MER fees if they in fact could make a straight comparison with all facts disclosed. It might be bye bye DSC fees.
Third Example: Many advisors are telling clients that they are charging a flat fee as a percentage of the accounts assets, say for example 1.5%. That is an all cost absorbed fee and is transparent and easy to understand. Finally success you say. Well, not so fast. If these advisors purchase funds or wraps for the client there is often a double payment of the MER and the flat fee. That may not be a real problem when it is clearly explained up front on the fund purchase and an allowance is made to the total fees charged. The problem is when the added MER is quickly shuffled aside in the conversation before the client gets a chance to ask a key question.
If I am paying you 1.5% to manage my account, why am I also paying the fund manager to manage my money as well? If the fund manager is managing the fund, what are you being paid for? Again, disclosure and transparency are the key. A good advisor should be able to justify the fund purchase and should purchase low cost funds and or exclude the asset from the 1.5% flat fee.
So, what do great advisor’s do when asked the question about fees. Well, they actually get out the paper and pencil and go through the various fees they may earn, who is paying them, and why they are being paid, and most important of all how they will report the fees to you. They discuss their role in the process, how they add value, what they commit to on your behalf. You see the best of advisors know that if they treat you like you are the one who is the paying client you will understand how they are helping. They also know that you will not likely switch advisors, because the odds are the new advisor won’t answer the fee question to your satisfaction. The truly great advisors will provide you with full fee disclosure, an annual summary of fees paid, and proper performance results for the funds you are paying to own. They provide a variety of cost options with recommendations as to what is most efficient when you are buying a new security. They discuss the new issue commissions they earn on many products to ensure you understand how your purchase decision impacts their earnings.
It’s not rocket science to make informed decisions with all the relevant facts clearly disclosed to an investor. If a client is “not interested” in the fee discussion then the advisor needs to slow down, back-up, and start the conversation again because clearly they are not conveying the message of how large the fees become over time and how much they can siphon from an account if not properly monitored.
The best portfolios have full disclosure by an honest hard working advisor to an informed and involved client. So does that sound like your situation?