How can you measure the value you are getting from your financial adviser? You can look at the level of service, communication and advice, but what most people want is to know is how their investments have performed.
Performance is quantifiable – a simple criterion for evaluating your adviser. Except it’s not always that simple because the numbers you get from your adviser might not give you everything you need to reach a definitive conclusion.
There are two crucial factors for evaluating your investments: how your returns compare to relevant market returns, and whether all fees have been incorporated into the calculations.
Comparing apples to apples
Performance figures presented on their own have little value. You need context to know how your performance stacks up against the overall market. If your investments rose by 10 per cent but the overall market rose 20 per cent, that’s a poor result.
A benchmark is a yardstick against which to measure your returns. And in many cases, you will not see a benchmark alongside your performance numbers in the annual statements, presentations, or in e-mails from your adviser. Note that financial advisers are not required to provide one, and in my experience, many do not.
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If you do see a benchmark, give your adviser bonus points. Then, determine whether it is an appropriate one. Appropriate means the benchmark reflects how your portfolio is invested. Your asset allocation – the mix of stocks, bonds, and cash in your accounts – should be similar to the composition of the benchmark. Different asset classes have different rates of return, so it’s important that you are comparing apples to apples.
For example, if you have a portfolio that has 80 per cent stocks and 20 per cent bonds, the benchmark should also have 80 per cent stocks and 20 per cent bonds. If your adviser is using a benchmark with just 60 per cent stocks, this will be easy to beat when looking at long time periods because bonds have lower returns than stocks. It is not a fair comparison.
If your adviser has not provided you with a benchmark, you can find one for yourself. The simplest way to compare your performance is to find an all-in-one ETF that has a similar asset allocation to what you have. For example, if you have a portfolio that’s 20 per cent fixed income and 80 per cent stocks, compare your performance to an all-in-one growth ETF, such as the BMO Growth ETF (ZGRO) or the Vanguard Growth ETF Portfolio (VGRO).
There are ETFs with other allocations, like 100 per cent stocks, 60 per cent stocks, 40 per cent stocks, and so on. Find ones that match what you have.
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There are some nuances to this. For instance, the geographic allocation of the stocks in your accounts affects performance. While some money managers would say the benchmark should have to same geographic allocation as the accounts, I disagree: geographic allocation is a decision your adviser is making, so a benchmark with stocks in all regions – Canada, U.S. and international – is appropriate, unless you have specifically asked them to exclude some regions or countries.
Is the performance shown after all fees?
Performance reporting is standard under securities regulation. Fees must be deducted from returns when showing performance numbers, but there are times when some or all fees are excluded in presentations, e-mails or other informal documents.
Be careful to look at the footnotes or fine print for this information. You want to see a disclosure that says something like, “Returns are calculated net of fees.”
If you don’t see this, ask your adviser to show your performance after all fees. You can figure it out yourself by deducting the amount your adviser is charging you, but I suggest you put their feet to the fire on this one.
Some advisers like to show your performance before fees because it makes the returns comparable to the overall market. It measures the skill of the manager. This is fine, but you need to know the performance after the fees because this is what you received.
Anita Bruinsma is a Toronto-based certified financial planner at Clarity Personal Finance.