April 26, 2021 Guy Carson

Selecting the Right Investment Advisor


investment advisor

Like everything in the investment world, selecting an Investment Advisor or Manager is part art and part science. In order to put a framework around the process, research houses will look at a number of categories which all conveniently start with the letter “P”. Depending on the investment house, there will be a different number of categories but the key four are:

  • People
  • Philosophy
  • Process
  • Performance

There are other categories which we will touch on below (parentage and pricing) but the four above are the key ones.

People focuses on the decision makers of the firm (not necessarily the people you talk to, more on this later). Philosophy and process focuses on how they make investment decisions and how replicable their performance is. Performance looks at historical results to prove that the process works.

Whilst there are many considerations, these four categories provide an insight into how investment decisions are made and by whom. If you are looking for advisor or thinking about reviewing yours, the best place to start is performance.

With performance, there are two key considerations. Firstly, if your advisor presents you with a stock portfolio containing 30 names that you have heard of, then they are most likely “Index Hugging.” Essentially what they are doing is presenting you with a portfolio that will closely follow the S&P500 and they hope will outperform by 1 or 2%. The portfolio will be put together with limits on Beta and Tracking Error, two measures of relative risk. Relative risk measures how far the portfolio will vary from the benchmark as opposed to absolute risk which measures how much you may lose.

These “Index Hugging” portfolios have grown in popularity since the Global Financial Crisis, because if your portfolio drops in line with the market then you can blame the market. The only problem is that Advisors’ fees haven’t dropped and the alternatives to these portfolios have risen. In most instances, an investor is better off in an ETF than in an Index Hugging portfolio paying significantly higher Investment Advisor fees.

The larger the advisory firm is and the larger the amount of assets they have under advice, then the more likely they are to hug the index. We saw this through the advisors we have relationships with last year. Smaller firms can move portfolios more dynamically and as a result they were able to adapt quickly and utilise hedging to protect the portfolio in February and March. The dispersion in returns was significant.

The second consideration for performance is found typically in larger advisory business and that is the presence of a rogue advisor. A rogue advisor is one that differs from the recommended portfolio of the house (regularly called the “House View”) and places their own views on the portfolio. These larger firms have significant investment teams and when a single advisor overrules them and makes his own decisions it should be a significant “red flag.” Typically, a rogue advisor will omit investments as opposed to adding additional ones, as most of these firms will not allow non-recommended investments on their platforms without a waiver from the client.

Most of these large firms will publish their portfolio returns on their website or they will be available through asking. The easiest way to check if you have a rogue advisor is to compare the returns of your portfolio to the firm’s model portfolio, if there is a difference then ask your advisor for an explanation.

Small advisory firms don’t usually have these issues as quite often the advisors are close to the decision making. This brings us to people.

When selecting an advisor, it is important to remember the person that you speak with most of the time is not the key decision maker and not the one you should be assessing. The client facing advisors are essentially sales people. Their job is to bring new clients in. The good ones are charismatic, they will get to know you and will build a relationship with you. Through this relationship, they will look to retain your business. However, in the scheme of things, these are not the people you should be basing your decision on. Instead, you should look at the firm’s investment committee and the depth of their research both through their internal team and their external research sources. Focus on who makes the decisions, not on who makes the sales. In smaller firms, these tend to be the same people, hence the risk of a rogue advisor is smaller.

Whilst I have been complimentary on smaller advisory firms so far, they do come with increased risk in another “P”, parentage. Larger firms have higher revenue, higher profits and bigger balance sheets. This makes them less risky from a solvency perspective. However, the offshore market allows us to mitigate this risk by using a third-party bank to hold your assets whilst the Investment Advisor manages them. This shifts the solvency risk from the Advisor to the Bank and we undertake extensive due diligence on all our banking partners. Recently, we were asked to undertake due diligence on a bank that wouldn’t release their financial statements to us. Needless to say, we won’t be recommending them.

Finally, I want to touch on another “P” which often comes into conversations, pricing. A lot of people are sensitive around the fees they pay and rightly so. As mentioned previously “Index Huggers” don’t deserve the fees they get because there are cheaper alternatives.

There are two key considerations on fees. Firstly, always look at performance on an after fees basis. We should be happy to pay if the advisor performs and if we are paying an extra 10-20bp for an advisor that has outperformed significantly then we are going to be better off in the long run. Fees should be a consideration in selecting an advisor but shouldn’t be the sole factor. The performance we are getting for those fees should be the key consideration.

Secondly, always look to avoid fees on fees. Typically, you will pay your advisor a percentage fee. If that advisor works for XYZ advisory and he places you into the XYZ Equities fund or the XYZ Bond fund, then that firm is most likely picking up double the fees from you. Fees on fees puts you in a very weak starting position as you have to beat the index by two sets of fees just to match it.

Hopefully, the above gives you an idea of what you should be assessing with regards to the Investment Advisor you choose. As trustee we have a duty to monitor of all our investment portfolios. If you do have any concerns around your Investments, advice, custody or fees, please contact Guy Carson for a confidential discussion at [email protected]. Alternatively, contact us here for any further information.


Disclaimer: The above contains the opinion of the author and is for information purposes only.  It is not intended to be investment advice.  Seek a duly licensed professional for investment advice

Guy Carson

Guy Carson is Southpac's Investment Specialist. Guy manages Southpac’s external relationships with investment advisors and banking specialists in client relevant jurisdictions around the world. In addition he works with clients to find the most appropriate solutions for their circumstances.
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