September, 2008
The Second Opinion: Advisor Scorecard

Advisor Scorecard

Most investors still rely on a financial advisor for investment ideas and advice. Advisors can be important allies for financial success – if they are competent and have their client’s best interests at heart. Unfortunately not all advisors fit this description and if yours is not up to par it can cost you thousands of dollars every year. Investors may not always be aware that they are receiving bad advice and even if they are suspicious they may not know whether the problem stems from a lack of competence or simply bad luck.

It is important to understand how high the stakes are. Some of the costs include:

  • Higher than necessary fees as a result of using a fee based rather than a commission based strategy in a buy and hold account; double dipping by putting new issues in a fee based account; avoiding the mutual funds with low MERs; and excessive trading.
  • Other costs relate to taking more risk than necessary – in the worst case scenario by encouraging investors to borrow to invest.
  • There is also the long term impact of underperformance which compounds year after year.
  • A common cost, often missed by individual investors, but never missed by institutional managers, is the cost of not having an investment strategy. Without a well thought out strategy you are always chasing after last year’s hot sector – and you will always underperform.

The reality is that there are many excellent financial advisors who dedicate themselves to helping their clients achieve their financial goals. These advisors are knowledgeable and they put their client’s interest first. On the other hand there are those who give bad advice either because they put their own interests first or because they fail to do the proper due diligence. In some cases they lack the proper skill and experience and in other cases they are simply lazy. Unless you can afford to lose thousands of dollars each year you need to know how your advisor stacks up. If he fails the grade you need to consider looking for a new relationship.

Most financial advisors are nice people, who talk convincingly and work hard to earn your trust. The problem is that few investors have the experience to accurately assess whether their advisor really does have the essential investment knowledge and experience – or is just lucky (or unlucky).

In order to help individual investors know whether they are dealing with a competent advisor, and to alert those who are dealing with one with a lower than average level of competency, we developed the Advisor Scorecard. This is a totally confidential tool and it can be used without entering either your name or your advisor’s name.

Investors are going to benefit from this new tool that measures and compares the quality of the service and advice provided by different financial advisors. We have consumer reports to rate all kinds of appliances and other material goods. We have surveys to rate the satisfaction of bank customers and for rating the effectiveness of advertising campaigns. But until now there was no simple tool that allows you to see how your financial advisor stacks up. This new tool will help investors get the results they pay for.

This free interactive tool is found at www.weighhouse.comresources/rate_advisor.asp. When you use it your advisor will be assigned a score based on your answers to a series of questions. If it turns out your advisor has a high score you can relax. If your advisor has a low score you are forewarned - and you can take whatever measures you deem appropriate to protect yourself.

You can also compare how you rate your financial advisor with how others rate theirs. It is not necessary, but if you want to you can indicate which firm your advisor works for. In this way we will create a data base which gives investors a hint as to the company in which they are most likely to find a highly rated advisor.

This is a brand new tool and your comments will be appreciated.

Don’t ignore the signs that you should change advisors

by Warren MacKenzie

Why this is important: Not every financial advisor is as experienced, honest, and competent as we would wish. If you have the wrong advisor, you may have to work a lot longer before you can retire — or you will have much less to spend in your retirement.

It is never wise to rush to change financial advisors. When you think a change is needed, the first step should be to explain your concerns to your current advisor. The source of conflict could be a misunderstanding. Making a fresh start with a new financial plan and a new Investment Policy Statement could get you back on track with less cost and pain than switching advisors.

On the other hand, incompetent advisors count on your wanting to avoid the pain, aggravation, and expense of changing advisors. If changing was easy, they might lose many clients. Yet, at times, the match is just not right. In such a case, the prudent thing to do is to make the change. Here are examples of what should prompt you to do so:

  • Evidence of dishonesty.
  • Evidence that recommendations are not in your best interests. An example might be frequent trading recommendations.
  • When the advisor keeps on recommending individual stocks even though his recommendations have underperformed the benchmark index for the past three years. In this case you would be better off using an index fund or an exchange traded fund (ETF).
  • When the financial advisor does not agree to some form of an Investment Policy Statement providing a clear benchmark against which his performance can be measured.
  • When actual performance is outside the range of expected results and the advisor does not have a satisfactory explanation of what went wrong.
  • Evidence that the advisor is earning the ropes by handling your accounts.

This is a serious decision. Not changing advisors could mean working for a few years longer than you planned. The wrong strategy could wipe out — in a single year — 20% or more of the value of your portfolio. Depending on your age, it may be difficult to recover from a loss of this magnitude. In making a decision to stay with a financial advisor, you must be mindful of the possible negative consequences. After one loss, you could lose even more if things continue to go wrong. In a bad portfolio and in a bear market, the losses can continue year after year. The financial advisor may lose a client, but you may lose your financial security.

Bottom line: Some situations are intolerable. That’s when you should make a change. If you don’t, you may have to work longer before you can retire.

What you can do now: Follow this link and Rate Your Advisor Today!

Second Opinion would like to welcome Alexandra Macqueen, CFP, to the team!

Alexandra is a Certified Financial Planner and comes to Second Opinion with experience from one of Canada’s largest investment firms. She will be opening Second Opinion’s second office in Toronto, in the Beaches Community.