Adviser website idea panned
Advisers say an online database comparing their performance will only end up hurting clients in the long run.
Monday, September 9th 2013, 6:39PM 
10 Comments
by Susan Edmunds
A former financial adviser is launching a website to compare adviser performance.
Miles Hayward-Ryan told media that a good adviser might earn clients tens of thousands of dollars more than a poorly performing one but there was no way for clients to find out.
Adviser Peter Cave said it was a very short-sighted idea. He said advisers needed to be careful not to get caught up in short-term numbers. Advisers could get hung up on trying to make six-month or 12-month returns look good and justify fees, he said, which would disadvantage clients who had a long-term perspective.
“There’s too much focus on the value an adviser adds. What other industry group do you have to prove your value in? I bought a dishwasher at the weekend – I didn’t debate with the adviser there and say ‘how much do you get paid, how do you represent value’?”
He said the industry needed to stop knocking advisers and think about the long-term advice they gave a client.
Murray Weatherston said the website might work if every adviser only had one model portfolio. “But once you have to take individual investors situations into account, it becomes a load of rubbish.”
IFA chief executive Nigel Tate agreed it could do more harm than good. He said he had seen similar attempts in the past and each had failed because there is no way of accurately comparing rates of return.
“Each client will have several variables that would or could affect the performance of their respective portfolio, their risk tolerance and capacity, their cash flows in and out of their portfolio as well as the underlying fund performance. Attempting to pull all of these into a single measure is a flawed way of measuring how an individual adviser is performing for his/her client, one client could have a lower performing portfolio simply due to the fact that their ability to meet their objectives is clearer and more easily achieved therefore the primary focus would or could be on risk reduction rather than rate of return.”
He said the IFA would not promote anything that suggested people could look at quantitative data, ignore the support around it, and come up with anything of value in the marketplace.
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Comments from our readers
1. The best method of assessing an advisers’ performance is that the investors needs are being met. That does not imply maximising investment returns.
2. I do not believe it will be reliable in terms of performance net of tax and fees. This is because of the way tax is treated. For example performance reports on Aegis do not allow for FIF tax, nor do they credit back the tax deductibility of the fees. There will also be problems with PIE funds, when there are credits and debits for the PIE tax paid by the PIP.
3. It may be better off going to performance gross of tax and fees. This would give a more reliable figure and increase sample size; i.e. there would be no need to adjust for the investors’ marginal tax rate.
4. The risk profiles being used need to be quantified. Eg provide ranges for the level of risky investments. Again, this has the potential to be misleading especially in relation to fixed interest. What for example S & P rating would a fixed interest investment be classed as a risky asset. Perhaps they should utilise the guidelines that Farrellys uses.
5. Performance reports do not effectively include the contribution from the cash component of the portfolio. For example the figure showing on the Aegis reports for cash is the Aegis cash rate at the period end.
6. It may be preferable to look at returns per investment sector. These seem to be more meaningful and are not influenced significantly by variances in asset allocation or by client withdrawals or deposits, or for that matter changes in risk profile.
7. What method is being used for performance calculations – arithmetic or geometric? Is there any time weighting?
8. I assume that for reporting purposes the currency used is the NZD. Again there will be significant differences depending on the level of hedging used.
Ah, but is that part of the problem? It's not part of the solution is it?
Should those ten different answers be wildly different, or variations of a common theme?
Maybe we need a benchmark of what the generally accepted parameters for the makeup of a balanced fund are. Maybe someone should invent a method for calculating risk-adjusted returns, and compare these, as well as fees..... If only such things were possible.
But so what?
The most important issue is NOT whether someone's balanced portfolio was slightly better or worse than some other guy's balanced portfolio or the AMP's Balanced fund or some US pension fund.
What matters more is how advisors decide what type of portfolio is most suitable for a particular client. That is what advisors offer that managed funds don't - personalised advice.
Getting the appropriate portfolio for a client (particularly so they will stick with it over time) is more important than getting a higher returning portfolio that is wrong for them (that they abandon after the first down market).
Now if someone could find a way of working out how good advisers are at assessing client's attitudes to risk and their time horizon, and matching that to a portfolio which achieves that goal and help them stick to, I will sign up!
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How would such a model trade off the risks taken on a portfolio (the higher risk, potentially the higher return). Or the fact that many clients could be dollar cost averaging (regular savings into), or withdrawing funds to live off.
This doesn't help at all in the education of investors or clients - we have a responsibility to teach people about these things so that the consumers don't end up going for the higher risk, higher returning investments (like finance company debentures, non rated bonds or property syndicates.)
Nowhere can this concept consider hat there is far more that a 'financial adviser' does for a client.
Like looking at their Goals and Objectives, making sure that their legal arrangements fit into their plans, measuring clients progress against their goals, and even, shock horror, look at what the risks are to their financial strategy, which may end up with arranging their personal insurances.
When are we going to stop equating 'financial adviser' with investment returns and start considering the value that a good financial adviser (as compared to investment flogger or manager) adds to a clients financial life?