Finding the best advisor: Our updated story

We just finished a review this past Friday with a client requesting an advisor search. He wanted our firm to find the best advisor for him and his family.

After finishing 50+ hours of review work on the advisors covering historical performance, background check on the investments advisors and their assistants, checking out fees on the assets and what fees were charged on other products like SBL loans we came to an interesting conclusion.

“The best advisors, those advisors doing great work, have an advantage they are not selling.”

We’ll explain as it was a debate about the importance of this statement and has more to do with advisors and their practice than clients. Firms have been teaching their advisors through actions, support, and encouragement that they sell an intangible service – Wealth Management Services. But, what is Wealth Management Services? It’s the financial planning, the lending, banking, and credit cards, the trust and estate planning, and then how the money is managed on a clients behalf. However, nothing in this is tangible. Immediately you’d point to the investment return as tangible. But in the interviews with these advisors not one, again, not one advisor pointed to their returns as part of the sales process. Why?

Before answering the “Why,” let us ask a basic question. What are investment advisors delivering to you, a client, in the end? it is not banking services or planning services. These are ancillary to the process. Extremely important but not the primary service, “the investment return.” As professionals who evaluate advisors every day we have to be careful here. Investment return by itself can create quite a sideshow. If we said to an advisor, “but your investment return was ok not great,” they’d immediately tell the client our firm was not suited to evaluate them. Why? Because we did not look at “risk-adjusted returns.” Quite humorous to us as a moderate investor is judged on a moderate return. If the advisor underperforms or over-performs as long as we know the slice to evaluate them on (moderate, aggressive, conservative and others) then we got it right.

The choices a financial advisor makes when constructing their portfolio create the overall client model. If those choices, cumulatively, do not match or beat the client model then it could be risk-adjusted returns and we acknowledge this but we then take it one step further and review the advisors individual managers/choices against their benchmarks. This, an advisor cannot avoid by saying “risk adjusted.” If an advisor choses a value manager rather than a growth manager to be “mindful of risk” we’d judge that choice of investment against a value benchmark not a growth benchmark.

So, back to the “why.” Since 2009 the markets have not performed the way advisors expected them to perform. We have a master database we keep of every advisors we evaluate or find for a client. In this database we compare each advisors returns against the appropriate investor benchmark. Only 12% of the advisors in our database have beat their client benchmark in a 3-year period of time. Is this indicative of a “great advisor?” Only 4% beat their client benchmark for a 5-year period of time?

We believe advisors are avoiding the tangible aspect of “investment returns” as a selling point because they cannot support the returns against their appropriate benchmark, right? Well, no. This is not true. Of those advisors beating their client’s benchmark they did not once, in our interviews with them for our client, discuss as a pivotal, tangible selling point their returns. Again, why? We believe it is that no one gave them the ability to evaluate how they are doing against others. These advisors, the best advisors, are on an island by themselves without the ability to know if they are actually performing well.

This is not about beating the benchmarks by the way. The benchmarks are a wish list of what someone would have done if they were invested in the markets 100% of the time. As former portfolio managers and Private Wealth Advisors, we completely understand what it means to be on the front lines when making decisions. Advisors, or those investing for clients, have to make decisions in the best interest of their clients. Unfortunately the past 8 years have been anything but normal so many times, when the markets looked particularly problematic, advisors would leave the market. WE don’t agree with this, but we do agree they might have shifted to a more neutral or defensive position if they felt this way – thus keeping money in the markets versus guessing on the direction.

Our note to investors:

  • There are advisors who have done well but judge them on the tangible -Client Benchmarks. When evaluating an advisor to replace or making certain your advisor is one of the best, you need to treat investment returns as a tangible. Something delivered to you on a regular, periodic basis – remember advisor fees are important as well. If an advisor is presenting to you a future portfolio with “the future portfolios returns,” don’t walk but run away. This is not tangible.

Our note to advisors:

  • You need to understand where your investment returns line-up for clients. If you do not have a clear path on this topic, you could be under-selling yourself or, you might need a new strategy. Being one of the best advisors means having a clear idea of yourself/team against others. Be mindful on what you are delivering to clients and how they view it.