There are a key set of variables that you want to ensure you have a handle on with your financial planner, to keep them honest and accountable
Like with anything, we all enjoy value for our hard-earned money! Be it from a great deal on a new outfit, a discount on your next family holiday, or even 50% off on your favourite items at the local supermarket – it is the feeling of a win.
Not only is it that ‘winning feeling’ but more theoretically, it is the knowledge that your investment in resources (money & time) have been put in the right place to maximise your desired result.
Before we move too far forward, we need to outline some key definitions. Firstly, the use of money can be defined more accurately by the ‘time’ at which you wish to use it.
For example, say you inherit some money from your parents’ estate when they sadly pass, then you and your advisor invest in shares/ stock of an oil producer. By doing this, you are moving your wealth from the present to the future.[1]
Therefore you ‘invest’ now, to move your wealth from the present to the future. Meanwhile, you may wish to use that money to ‘consume’ now – rendering those same funds null and void should you wish to use them in the future. This is an important distinction for the next section of this chapter.
When choosing to use the services of a financial planner, you are choosing to plan, hence, moving your wealth from the present to the future. However, there are going to be costs that you need to consume for the ‘services’ both now (for the planner’s time) and into the future (trailing commissions, performance commissions etc) depending on the type of services and investments you choose.
So, what are the key metrics by which you should measure your financial planner?
As a client of a financial planner, it is often hard to look past the ‘bottom line’ or in other words how much money you made this year vs. last year.
In addition, it is often difficult to ignore the often-dramatised success of people investing in speculative or high-risk instruments – which in many cases is no different to putting your money into the casino!
Here is what to look out for when you want to measure up your financial planner:
1. Past Performance
You may have heard the term “past performance is not an indication of any future returns” and this most certainly is the case. However, if you are looking for a capable financial planner, you most certainly want to deal with one that has a history of delivering returns – ideally superior returns to just putting your investment in a bank term deposit or managed fund.
Ask for a review of the past 5, 10 or even 20 years performance if your financial planner has been around for that long, and take a look at what they have delivered for their clients.
If you are already engaged with your financial planner, it is key that you again look at the past performance, how your money has tracked in the short, medium and long term vs the plan you sat down and created together at the start of the financial year or your engagement with the planner.
If there are deviations, they need to be worked through, strategies iterated and plans updated to ensure that your financial goals and objectives are being met, or better yet, exceeded.
2. Planning
We all understand that things don’t always go to plan, nor is it always wise to stick 100% to the program. As a client, your financial planner should have a handle on your accounts, on opportunities that could be appropriate, but also if things are not going as planned - they should have a way to get things back on track.
Implementing hedging, divesting some investments and moving them into different asset classes when required is one of the key features you should be looking for in a financial planner.
You should always measure your financial planner on what is coming next, not just what has happened in the past. What are their plans for your money? What are their plans to increase your wealth and enable you to enjoy your future with financial security? If they can’t answer that, even if your performance is outstanding, then you have some serious questions to ask.
3. Transparency
One of the key elements to consider around performance and measuring is not just what your financial planner is saying, but what they are not saying. You need to take a look into your statements, into their marketing materials, their product disclosure statements and ask several key questions:
If you are answering no to any of these key questions, then it is time to have ‘the hard talk’ with your financial planner to ensure you are getting the right advice, not off the shelf service.
4. Accountability
In addition to this, your financial planner should exercise accountability in relation to investment vehicles, funds or instruments they direct or advise you to invest in. For example, if your financial planner has a retail fund – such as a property investment opportunity with 15% returns p.a over 5 years, that may sound great, and it may fit into your risk tolerance, however, has your financial planner invested their own money in the funds?
There is no better way to keep them honest and accountable to what they are recommending you to invest in, than by ensuring they are investing in that same product themselves.
In summary…
Although it may seem obvious, the first KPI (key performance indicator) that you should be looking at as a measure of your financial planner's performance is the financials. How much has been made/lost? Has the plan that was formulated at the start of your planning process been stuck to? If not, why and were you informed?
In terms of your performance were you over what you expected, if so is your portfolio investing in assets that are above your risk tolerance? Conversely, if you are not achieving the benchmarks, is your portfolio investing in the right products? Is your planner too conservative? These are all questions you should be asking.
Then you need to ensure that they are being transparent in their reporting to you, honest about the performance of potentially underperforming assets or potential bad investment choices. By doing this, they are being accountable, which is paramount to ensure your financial future.
Remember, that this is your money, your future, and your path, although your financial planner is acting as a ‘tour guide’ of sorts, you should not feel out of your depth with any of your investments. You should feel that you are getting value for money, good service and honest people acting on your behalf.
[1] McMillan et. El (2011) Investments: Principles of Portfolio and Equity Analysis, CFA Institute, Wiley & Sons, NJ, USA, P.3
[2] https://www.fool.com/investing/general/2012/05/11/how-to-assess-your-financial-advisors-performance.aspx