How do we determine which financial firm is best for managing our money?
We have multiple financial advisors wanting to help us manage our money. Most of the firms have an invest, diversify, and hold strategy. The most recent firm that wants to manage our money sounds like they are a little different in that they are more proactive in looking ahead and positioning assets for long term. With all of these firms, how can we decide which one is best? Is there a ranking based on return versus benchmark return?
Great question. When you go to buy a mutual fund you’ll see a set of numbers clearly showing you the fund’s short and long term track record. A financial advisor’s investment track record is similarly quantifiable, but few advisors volunteer that information. That puts most investors at a disadvantage.
But you’re smart to be asking these questions, because you need to see how well the advisor is doing for their clients after all fees and costs are deducted. Without that, you don’t have the information you need to determine if they are doing a good job.
There is a measure that is used to compare advisor performance, and that is called “GIPS”. That stands for Global Investment Performance Standards. These are international best practices maintained by the CFA institute. To comply with GIPS, a firm must provide data in a specific format, then have it independently verified by a third party. The net result allows you to compare apples to apples so you can easily evaluate money managers.
Unfortunately use of GIPS is not common. Our firm is one of about 1,600 firms worldwide that voluntarily disclose our results so our clients can see them. Most firms that adhere to these standards serve the institutional world, not individuals. But we do, since we are committed to transparency.
I recently wrote an article about why GIPS is a great tool for investors:
Of course, no firm can or should promise consistently high returns. If they do, that should be a red flag. Instead you want to see that they can generate net returns (after all fees and expenses) that meet or beat the indexes, with less risk.
Financial planning is also important, so I recommend that you look for someone who has obtained the Certified Financial Planner credential, which is a respected credential. And you’ll want to look for a firm that is fee-only, to minimize conflicts of interest. You also would be well-served to ask any firm you’re considering to confirm in writing that they will serve as your fiduciary 100% of the time, which legally requires them to always put your interests first.
Unfortunately it’s not always easy to get the facts you need to make a sound decision. So we have created a free ebook to help you learn the best questions to ask, which can be found on our website at https://arroyoinvestmentgroup.com/.
Best of luck in your search.
Two points: (1) never select a manager based on their past track record; and (2) any fool can build a portfolio that conforms to some benchmarks and their perception of your ability to assume risk. Brokerage-firm training programs have pounded this latter "skill" in to their new employees for long enough that at this point the world is full of point-and-click asset managers, all of whom will be happy to tell you that they are your best choice. The "proactive" manager may be different, but from what you say it sounds like they are just a bit better at their marketing-pitch.
Instead, find someone you can trust. An advisor shows their true worth when they guide you through a tough transition in your family's financial circumstances (i.e., retirement, death, inheritance, lotto winnings, etc.). They also show their true worth when they guide you through a tough time in the market. What an advisor does when stocks tumble is far more important to you than whether they exceed a benchmark by some smidgen when markets are benign. Use word-of-mouth. Ask your wealthiest friend, or the richest family at the country-club/church you go to, or a very old friend whom you know has lots of good contacts. Investing is a service and not a product, and you want the best service you can find. Good luck.
I think the first question you should ask advisors you are interviewing is that "do you operate at a fiduciary capacity?", which really means is that do you have any conflicts of interest when providing me advise or managing my portfolio. Ideally, you want a Fee-Only advisor, where they do not (or should not) recieve commissions from any investment producuts they offer/sell you.
Historical evidence has proved that active portfolio management does not fare better than passive portfolio management so you want to look for an advisor who believes in a "buy and hold" investment philosophy while using the most cost-effective investment options available (index funds and enhanced index funds). You probably want to stay away from an advisor who actively trades individual stocks.
This question is worthy of an entire book, but I'll try to summarize my view. The first step is to determine what you want from a money manager. If your goal is to beat the market, then a market-based benchmark is appropriate. But benchmarks are backward-looking and therefore contain no risk. The best performing strategy over the last 9 years turned out to be completely ignoring risk. If your goal is to accomplish your financial objectives with the highest probability possible and in the timeframe you want, then the evaluation criteria should probably not be return versus a benchmark. The only benchmark that is relevant is the average return you need to accomplish your goals, in the timeframe you need. The stock market, for example, does not promise an average return, and it doesn't care about anyone's timeframe.
So criteria number one should probably be whether they are listening to you or simply telling you how great their strategy is. We all think our strategy is the best, so that probably doesn't help you much. The financial plan, which will determine your own personal benchmark and timeframe, should drive the investment strategy, not the other way around. You will also want to find an advisor who can integrate your investments with all other aspects of your financial life.
Keep in mind that if an advisor uses a strategy that can beat the market, there will almost always be stretches of time that the strategy will underperform the market. Using a market-based benchmark instead of one that has some relationship to what you are trying to accomplish tends to cause people to bail out on a strategy at the worst possible time, so I would suggest finding an advisor who listens to you more than they describe their strategy.
I have 36 years experience as an advisor, about 20 years as a commission based (what used to be called a stockbroker) adviser at one of the largest brokerage firms, and for the last 17 years as an independent Registered Investment Advisor (RIA). Besides the obvious like trusting and liking the philosophy of the adviser, in my opinion there are two important criteria. First, you should hire someone who is "fee only". Second,hire someone who publishes portfolio results in a public forum. A little gray hair doesn't hurt either!