By Charles B. Flowers, CFA
At the end of every month, quarter, and year, the investment world tallies returns and produces reports. Frequently the results are delivered in chart-filled reports with percentages and cryptic words used to explain what is happening in the financial world as well as in your portfolio. Navigating performance reporting data from your financial advisor is an important skill for every investor to learn. You should understand the language in reports, how to evaluate the performance of your portfolio, and how fees affect your return.
The following three questions can go a long way towards comprehending these items.
1. Terminology: please define?
All professions develop their own special language that allows them to communicate efficiently. The financial world is no exception. The problem is many times financial meetings can be filled with financial jargon that impedes a clear understanding of what is really being discussed. As your financial advisor explains an investment strategy or performance numbers and you hear jargon or words that are unfamiliar, ask for explanations of any financial term, chart, or number that you do not understand. After you have received a suitable explanation, follow up by asking: Why is this important, and how does it apply to me? These questions will give you a better, stronger comprehension of the financial world and how it is impacting your performance or goals.
2. What is the stated (or unstated) benchmark that you use to judge performance?
Benchmarks serve an important role because they help frame results. Without a frame, it is hard to know whether or not a 7% return is terrible, average, or outstanding. Investment managers are motivated to have returns in line with benchmarks or other groups of advisors. Knowing which benchmark the manager is using to evaluate results will help you to understand the motivation behind the advisors’ investment philosophy and implementation.
On the other side of the coin, if you want your advisor to beat the benchmark, you must allow the advisor to be different from the benchmark. Being different means that at times the advisor will underperform the benchmark. Placing a higher weight on long-term performance and having the advisor talk you about why they are underperforming will help you develop a better picture of the advisor’s skill and tolerance for making active investment decisions.
3. How did I do after paying everyone who is involved with my investments?
Fees are important, popular topic. As you inquire about the financial advisor’s fees, the most important factors to know are:
• How much is the fee?
• How the fee is calculated?
• What services are being provided?
Do not assume that low fees guarantee high returns. We all like lower prices, but fees are just one part of returns.
For the financial services profession, the two main categories of fee structures are assets under management and commissions. There has also been a growing trend of combing a flat fee along with one of the major categories.
In the assets under management fee structure, financial service providers charge a small percent on every dollar that they manage on your behalf. In this fee structure, the advisor makes more money by increasing the amount of dollars under management.
Under the sales commission fee structure, financial service providers make money by selling you something. In this fee structure, the advisor makes more money by increasing the number of sales and/or selling investments with a higher commission.
Both fee systems have the potential to generate good returns. The key is to know what fee system the service provider uses, what your total fee is expressed in dollars, and what the potential conflicts are.
To make sure that your service providers are working for you and your goals, an investor needs to understand how advisors are paid, how they view and can explain their view of the world, and how they benchmark themselves. Addressing these three topics during your meetings will help ensure that you are receiving the information you need to move your investment goals forward.
Charles B. Flowers, CFA graduated from the University of the South (Sewanee) in 2001 with a BA in Economics. After graduation, Charles returned to Columbia, SC and began work with Abacus Planning Group. Charles earned his Chartered Financial Analyst (CFA) designation in 2017.
Abacus https://www.abacusplanninggroup.com/ is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.5 billion on behalf of its 240 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.