# Evaluating a Financial Advisor



## cwiebe (Sep 29, 2009)

I am coming up to my first anniversary with my Financial Advisor / Broker. I didn't give him all my money, he has a little over half of my investments.

I was wondering what would be a fair assessment of his performance. Should I compare his return to the TSX? Or, is that an unfair comparison as his strategy is longer term.

I should add I include dividend payments as part of the personal rate of return. I will also ask him what he thinks the PRR should be for 2010.

Thoughts?


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## mario 1 (Nov 6, 2009)

One year may not be a fair period of time to judge his worth.
Comparing to an index can be misleading, although most use that method.
Personally I would expect him or her to have a return of at least 5% over that period.


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## Four Pillars (Apr 5, 2009)

I think it depends on why you hired him.

Was it to beat the index with your investments? - then compare to the index.

Was it to take care of paperwork and do things like rebalancing for you?

Was it to help with actual financial planning? Retirement goals, asset allocation, investment product choice etc.


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## andrewf (Mar 1, 2010)

You could compare his performance to that of an ETF portfolio with a similar risk profile (ie, don't compare him to the TSX alone if you have 60% bond allocation).

Next, ask yourself whether you want an investment advisor (aka stock/MF picker) or a financial advisor. The latter is where I think value is added, personally. Make sure you're getting it.


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## the-royal-mail (Dec 11, 2009)

I think everyone has their own evaluation criteria. Personally I don't trust anyone. I would prefer to pick my own index funds (now that I have a better understanding of how some of this stuff works) with low MER's and relatively good performance.


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## OptsyEagle (Nov 29, 2009)

cwiebe said:


> I am coming up to my first anniversary with my Financial Advisor / Broker. I didn't give him all my money, he has a little over half of my investments.
> 
> I was wondering what would be a fair assessment of his performance. Should I compare his return to the TSX? Or, is that an unfair comparison as his strategy is longer term.
> 
> ...


So if he got lucky and beat the index he keeps his job and if he did not get lucky and fell behind a little, he goes. Then what. Play this silly game over again until the next advisors luck runs out.

Advisors have no ability to outperform an index. They can probably help you outperform yourself, if you have little experience, and can certainly give you tax and retirement advice, but they are held hostage by the whims of the stock market and what the future throws at them, like everyone else.


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## wheel (Jun 22, 2010)

cwiebe said:


> I was wondering what would be a fair assessment of his performance. Should I compare his return to the TSX? Or, is that an unfair comparison as his strategy is longer term.


That's a perfectly fair comparison. Not only did he not beat the TSX in the short term, but it's an almost statistical certainty that he won't beat it in the long term either. 

So why aren't you just in an index fund to start with?


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## KaeJS (Sep 28, 2010)

In my opinion, the best FA is yourself.

Why?

Because nobody cares about your money like you do.

And as someone else said, everyone is subject to the future. Take some time to learn the markets, watch some stocks for a few months, and you'll figure out how to make money.


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## Jungle (Feb 17, 2010)

Your acceptable return rate will be subjective to you, however, if you can acheive the return of the index through a low cost ETF, minues a very small MER, then shouldn't you be paying him to BEAT the index PLUS the cost (1-3%) of the mutual fund? Not likely going to happen. 

Example: if the index + divideds returns 8% and the mutual fund costs 2.5%, you think he can get you more than 10.5% ? I wouldn't put my money on that. 

If you don't believe in paying them to beat or match index after cost, you're essentially paying thousands for them to write a financial plan and maintain your asset allocation. Just make sure you understand and are happy to pay thousands for that. 

Careful switching out, a lot of those mutual funds have a large penality fee to sell for several years.


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## kcowan (Jul 1, 2010)

cwiebe said:


> I am coming up to my first anniversary with my Financial Advisor / Broker. I didn't give him all my money, he has a little over half of my investments...


Did you always accept his stock recommendation? How have they performed? How have your own stocks performed? What asset classes does he watch for you.

This is a very personal decision and the broker can only measure up to what you are asking him to do. Objective measures are tough because of the amounts of money involved.


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## Belguy (May 24, 2010)

Well, I have had years of experience in this investment game and, when all is said and done, I have ended up with a diversified portfolio of mainly broad-based ETF's.

Check out the model portfolios at www.canadiancouchpotato.com

Buy, hold, periodically rebalance and prosper!!!


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## cwiebe (Sep 29, 2009)

I'm just trying to establish an objective criteria to evaluate an advisor/broker. It seems counterintuitive to wait 20 years and then declare "well - that guy was no good".

Yes, I have always accepted his recommendations. My portfolio is outperforming his, but I think this is probably due to a longer vision on his part. 

Does time factor into it? I know most stock picks don't beat an index in any given year. Does this change over time? Will a balanced portfolio start to improve over the years and be more likely to beat an index?


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## OptsyEagle (Nov 29, 2009)

cwiebe said:


> I'm just trying to establish an objective criteria to evaluate an advisor/broker. It seems counterintuitive to wait 20 years and then declare "well - that guy was no good".


You are using the wrong criteria. No human being, identified in advance, can continuously beat the index. If he could, why would he be helping you? He may be able to beat your personal performance, if you lack experience and interest, but he won't be able to beat all the smart people trying to beat him (unless he gets lucky).




cwiebe said:


> Yes, I have always accepted his recommendations. My portfolio is outperforming his, but I think this is probably due to a longer vision on his part.


No that was random luck. Next year the coin flip will probably change ... or not. We will know after next year.



cwiebe said:


> Does time factor into it? I know most stock picks don't beat an index in any given year. Does this change over time? Will a balanced portfolio start to improve over the years and be more likely to beat an index?


How can all the stock picks beat an index that is the mathematical average of all those stock picks? How can all the stock pickers beat an index that is the mathematical average of all the stock picks of all the stock pickers?

I know you want to have the control of picking an advisor that can provide you with better than average performance, but so does everyone else. That doesn't make it happen or even make it possible. As I said above, everyone cannot beat the index, since the index is the average of everyone. In any given year 1/2 will beat the index and 1/2 will not, and since it is based on forward looking assessments, the ones that beat it the next year will be randomly dispursed from those two groups. Just like flipping a coin.

I hope that helps.


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## wheel (Jun 22, 2010)

cwiebe said:


> I know most stock picks don't beat an index in any given year.


Incorrect. Some do, in any given year.

Go out to an average 3 year timeframe and you'll have a difficult time finding someone who's beat the index routinely.

Go out to a 20+ year timeframe and the stock picks (i.e. financial advisor) that beat the index over that period is something like < 3%.

So you either find those 3% of advisors that beat the index, or throw your advisor to the street and put it into an index yourself.

Ooooh, except finding those 3% of advisors? Statistically random - you can't tell them afterwards.

Or you can look at it another way. Either you believe the stats that if you simply passively invest in index funds you'll beat 97% of financial advisors just by doing that, and become an index fund believer, or you continue to hope that all the education your financial advisor has will allow him to beat the indexes (hint: your financial advisor likely has 0 education that trains him to do this).


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## HaroldCrump (Jun 10, 2009)

wheel said:


> Or you can look at it another way. Either you believe the stats that if you simply passively invest in index funds you'll beat 97% of financial advisors just by doing that, and become an index fund believer, or you continue to hope that all the education your financial advisor has will allow him to beat the indexes (hint: your financial advisor likely has 0 education that trains him to do this).


We should also consider that there is a difference between financial advisor and mutual fund manager.
Most financial advisors are investing your money in mutual funds, which means there is another layer of selection on top.
First, the mutual fund manager has to pick the right stocks.
Second, your financial advisor has to pick the right mutual funds.
Thirdly, you have to pick the right advisor.
Pretty hard to get all three steps correct every year, year after year.


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## Belguy (May 24, 2010)

Don't beat yourself to death over this!! Rather, go to www.canadiancouchpotato.com and pick out a model portfolio that you like.

Over the long term, you might do better but the odds are against you.

Buy index products, hold, periodically rebalance as required---and prosper.

Let other investors keep the financial services industry prospering. Keep your own money working in your own 'Easy Chair' based portfolio.


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## kcowan (Jul 1, 2010)

HaroldCrump said:


> ...
> First, the mutual fund manager has to pick the right stocks.
> Second, your financial advisor has to pick the right mutual funds.
> Thirdly, you have to pick the right advisor.
> Pretty hard to get all three steps correct every year, year after year.


Right. No wonder so many people give up and invest in the index directly. It feels so good to be average!


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## Belguy (May 24, 2010)

"It feels so good to be average". Yah, right!! The truth is that index investors virtually always outperform even professional money managers in the long term.

I submit as evidence that Goldman Sachs has just been named 'The Most Accurate Forecaster of Stocks on the Street Today'.

And no wonder what with all of their high paid help and resources, research staffs, and banks of computers etc. etc.

And so, how often did they get their stock predictions right?

Would you believe 38% of the time!!

And so, go ahead with your individual stock picking if you will. I do assume that most small investors do not have the resources to draw on of a Goldman Sachs.

My conclusion is that you will only be right much less than 38% of the time, long term.

Quite fooling yourself and invest in the indexes!!

Also, quit trying to find a financial advisor with the hope that he or she will outperform the indexes long term when the best forecaster in America can only do it 38% of the time.


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## Jungle (Feb 17, 2010)

Or just buy blue chips when the market crashes.


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## Belguy (May 24, 2010)

Do you mean to tell us that there will be more market crashes in our lifetimes?

How long is it going to take to rebound from the next one???


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## Jungle (Feb 17, 2010)

Belguy said:


> Do you mean to tell us that there will be more market crashes in our lifetimes?
> 
> How long is it going to take to rebound from the next one???


Nobody knows belguy.


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## kcowan (Jul 1, 2010)

Quarterly rebalancing is your friend. It will protect you from everything but a "flash crash". Setting tight ranges on percentages could protect you even more.


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## Belguy (May 24, 2010)

When you are an investor, you have to be prepared for a "flash crash" to come along at any time, completely unannounced, and usually as a result of some unforeseen 'Black Swan' event that comes out of left field when you least expect it.

The stock market is like a rollercoaster ride. The ride up the hill doesn't go on forever and the drop can often be steep and fast.

Defensively, all that you can do is to make sure that your asset allocation is appropriate for your circumstances and invest in broad-based index products and don't chase after the hot sectors de jour. Oh, and don't forget to rebalance periodically, as required.

Slow and steady wins the race.


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## kcowan (Jul 1, 2010)

Rebalancing is the secret because you are in a risk avoidance position.


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## wheel (Jun 22, 2010)

Rebalancing, that's where you take money out of the top performing investments and put it into the low performing investments right?

Somehow, that's not making a lot of sense.


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## kcowan (Jul 1, 2010)

wheel said:


> Rebalancing, that's where you take money out of the top performing investments and put it into the low performing investments right?
> 
> Somehow, that's not making a lot of sense.


It is a technique that couch potato investors use to limit losses (and gains).


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## martinv (Apr 30, 2009)

It would appear that through rebalancing, you are faced with a sell commission, capital gains taxation , and another buy commission. Never done it myself so it is just a thought.
But then I never sell, just don't feel smart enough to know if my investments are going to go up or down in the future. I admire those who are smart enough to be able to predict the future, but I haven't met many in my lifetime.
I follow the few companies I am invested in but only occasionally do I look at the stock price at any given time because the next day it might go up or down again. I hear that some traders, don't know if they should be called investors,buy and sell in milliseconds. Wow, wonder if they are all making billions.
Every investor is different and that is why the market works, sort of.


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## jamiechese (Jul 13, 2010)

I believe re-balancing could be done two ways. You can either ONLY buy shares to re-balance or you could sell AND buy shares to re-balance. I honestly think that trying to re-balance by leaning more towards only buying shares makes the most sense, seeing as it would incur less fees AND grow your portfolio more. Although I wouldn't hesitate to CHANGE a certain allocation is something was not performing very well or is doing extremely bad etc etc....
*
Example Conservative Portfolio*
Canadian Dividend Equity 12.5% 
Global Dividend Equity 10% 
Global Real Estate 2.5%
Preferred Shares 10%
Corporate Fixed Income 30%
Government Fixed Income 30%
Cash Alternative 5%

Now lets say.....your allocation of Canadian Dividend Equity changes, either by dividends being automatically reinvested or by the stock prices rising/falling etc. That allocation would therefore fall or rise and in turn effecting other allocations. By re-balancing, either by selling or buying new shares of those stocks you are keeping those allocations to a specific amount.

NOTE: I am in no way saying this is the proper way of re-balancing but its how I feel it should/could be done and that it is an effective way of doing so, feel free to correct me if I screwed something up.


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## Eclectic12 (Oct 20, 2010)

Re: I'm just trying to establish an objective criteria to evaluate an advisor/broker.

There are a lot of factors to consider. For example, if for some reason you instructed the advisor to avoid resource stocks in the timeframe that resource stocks do well, is it any surprise that he won't beat the index, as the index likely contains resource stocks.


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## Eclectic12 (Oct 20, 2010)

OptsyEagle said:


> How can all the stock picks beat an index that is the mathematical average of all those stock picks? How can all the stock pickers beat an index that is the mathematical average of all the stock picks of all the stock pickers?


Say what?

Some indexes may include all of the stocks on the exchange but a lot don't.

For example the S&P/TSX composite index covers approximately 70% of the market capitalization for all Canadian-based companies listed on the TSX. Changes are made to the index during the year. For example, as of Sept 20th, 2010 additions to the index included companies Allied Properties REIT, Calfrac Well Services Limited as well as NevSun Resources Ltd. Deletions also occur at various times during the year.

So it's more of a moving target.


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## atrp2biz (Sep 22, 2010)

*Sharpe Ratio*

I compare the performance of my portfolio using risk-adjusted metrics. To me, the Sharpe ratio does just that. I have a spreadsheet that calculates IRR on a monthly basis of my portfolio that takes into account any contributions or withdrawals using the XIRR function. This allows me to determine the standard deviation of monthly returns within my portfolio and any indices I compare the portfolio performance with.

I think this would be a reasonable long-term metric to evaluate the performance of various funds, advisors, etc.


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## wheel (Jun 22, 2010)

kcowan said:


> It is a technique that couch potato investors use to limit losses (and gains).


I was being facetious. 

Portfolio rebalancing is another area of investing that is generally accepted common practice - but that is not necessarily rooted in reality. 

I asked a noted and published actuary about portfolio rebalancing a few years ago - exactly why would you take money from demonstrated top performers and transfer it into demonstrated poor performers. And his answer was basically 'good question, why would you do that?'.

One might be inclined to question the practice to ensure that it's not just a feel good strategy.

Ah, found the quote. Note that this is from a professor and author on the subject:


> Years ago I asked a classic 60:40 client why they rebalanced. He said "if we didn't rebalance we might end up 95:5. So, I asked, which would be the 95? Equities, he said. So, I asked, you keep selling equities to avoid that risk? Yes, he said. Oh, I said.


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## Four Pillars (Apr 5, 2009)

In my opinion, the main benefit of rebalancing is to keep your portfolio to your desired asset allocation and risk level.

If you want 50/50 equities/bonds, then you will have to rebalance if it gets out of whack.


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## Belguy (May 24, 2010)

Right on!!!


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## kcowan (Jul 1, 2010)

Rebalancing reduce the gains and losses from a portfolio. For those that are risk-averse, it is a good strategy.

For active investors, not so much.


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## humble_pie (Jun 7, 2009)

the way i interpret FP's & cowan's comments is that the risk profile must be decided first.
upon this, the asset allocation model is built.
individual instruments are then selected.
periodically, the whole shebang has to be rebalanced to bring it back in line with established risk levels.

i myself would never do anything like this - i'm a bottom-up stock picker and i like risk - but i can see the advantages for many kinds of investors.

still, the old saw says Cut your Losses and Let your Profits Run.


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## MoneyGal (Apr 24, 2009)

Just like DCA'ing, rebalancing is a technique used to reduce portfolio volatility. It does not increase expected return. (By the way, nor does increasing equity allocations beyond about 60%.)


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## humble_pie (Jun 7, 2009)

but volatility is exactlly what i want.


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## MoneyGal (Apr 24, 2009)

Exactly. It's the only way to make substantial gains.


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## Four Pillars (Apr 5, 2009)

humble_pie said:


> the way i interpret FP's & cowan's comments is that the risk profile must be decided first.
> upon this, the asset allocation model is built.
> individual instruments are then selected.
> periodically, the whole shebang has to be rebalanced to bring it back in line with established risk levels.
> ...


But, you are doing that. 

You chose 100% equities and then you chose to buy stocks and finally you decided which specific stocks to buy.

Ok, in reality you probably just decided to be an individual stock owner which led to the 100% equities.

Your "rebalancing" would involve different types of stocks or even just individual stocks. If you had one stock that was 40% of your portfolio, would you leave it or think about reducing that amount?


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## humble_pie (Jun 7, 2009)

yup i woke up one day in the back of the turnip truck, brushed the hay out of my eyes & the seeds out of my ears, and discovered that i owned these, er, stocks. And i was, er, trading options on em. Faster than a fiddler could fiddle or you could clog at a country barn dance in the merry harvest month of october, hey.


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