Investments are like your car, they need servicing
Advisor needs to be as trusty as mechanic
Being an old car buff as well as a portfolio manager, it isn’t surprising that I tend to see a lot of similarities between the maintenance of automobiles and investments. For example, in order to extend the life of your vehicle, everyone knows it’s important to have the oil changed on a regular basis. Likewise, you should review your portfolio on a regular and consistent basis, especially since there have been more than a few car wrecks in this volatile market due to unrepaired portfolios.
However, more often than not, that “free” inspection during an oil change results in some additional work to be done that can add a lot to the final bill. Many of us are too trusting and go through with what at times can be an unnecessary auto repair rather than seeking a second opinion. On the flip side, there are those who don’t get a necessary repair done, which could compound the problem down the road or even result in a dangerous situation.
By doing a little homework and being diligent, one can find a trustworthy, independent mechanic who you know will properly take care of your vehicle while avoiding unnecessary repairs.
I have found my father, a retired mechanic, invaluable whenever my car is undergoing maintenance. And, begging your pardon, I would like to extend a similar service by recommending three simple but very effective questions to ask at your next investment review since investors are often left beholden to the information being provided by their advisors.
An excellent starting point is to demand a full and comprehensive breakout of the fees you’ve paid over the past 12 months. Then ask for such information for all of the prior years that you’ve been doing business with your advisor. Do not settle for anything but full disclosure of trading commissions, hidden deferred sales charges, administration fees, mutual fund management fees, wrap account fees, sales commissions from brokered deals, spreads taken on bonds purchased, etc.
Insist on a detailed breakdown in writing that includes a total percentage of your portfolio and/or an actual dollar amount. An ethical advisor will have no issue with sharing all of this detail in a written report. Do not settle for a quick phone call or a vague response such as “we always get you the best deal and the lowest fees.” If an advisor balks at a written breakdown or the report looks incomplete or misleading, speak to the branch manager.
Secondly, and more importantly, ask to see the performance of your portfolio — which should include the past six months, 12 months, two years, five years and from inception date (net of fees) — compared to a benchmark. For example, if you have a primary equity or allstock portfolio, you should be able to easily compare returns against the S&P/TSX or a global equity benchmark. Look for this information to be on the investment firm’s letterhead and signed off by the branch manager.
If the numbers look too good to be true, ask to see the numbers backstopping the figures provided. Again, do not settle for anything communicated verbally — get it in writing.
Finally, ask your broker what they are specifically doing to manage the risk in your portfolio. Don’t settle for an asset allocation discussion.
In addition, risk management should go beyond the use of basic stop-loss and stock- picking strategies, which can be quite ineffective in a rapidly falling and highly correlated market.
These three easy things will help ensure you are not getting hosed by your advisor and that your investment portfolio is a well-running machine capable of driving through rough market conditions.