Do You Really Know Me?

Today a lesson. I recently have been agonizing over how our company, even with the greatest effort expended, can come up a little short in fulfilling our objective of providing the most complete and highest quality assistance in managing your financial life, when judged against the ideal industry standards. See we never really invented anything new, we just believe that good Planning and comprehensive Feedback would put us yards ahead in the advisory business. But today instead of reflecting more on how we are doing, let`s find out how you are doing. As you read this, make your own checklist to measure your own situation. See how your advisor is doing against what the industry suggests needs to happen for successful investment management.

What is Investment Management?

Investment Management is not unique in that it is a continuous process designed to meet specific goals and objectives within a set of constraints. Like many management processes, it can be grouped into the broad stages of Planning, Execution and Feedback. We certainly can all agree that Planning before Doing and then Measuring how you did is a good formula for success in any endeavour.

Planning 

So, your advisor should have been schooled to plan his work for you. Specifically, he is to determine your Investment Objectives (the Return needed to meet your goals and the Amount of Risk that can be tolerated) and any Constraints. Using this information he will establish an Investment Policy. A what? Following the policy established he shall develop a Strategic Asset Allocation to meet the policy. Maybe that chart thingy in the folder.

Now before going any further, pull out the list of your objectives and constraints, your Investment Policy Statement and your Strategic Allocation, so you can refer to them as we proceed. Can’t find them? How can that be? Well it is because it is talked about and held out as essential, but they are NOT REQUIRED. What is required is that an advisor “Know The Client” to open an account. This is one of the cornerstones of the investment industry and is a mandatory requirement to open an account, so we know some information is being recorded. However, even here the industry has chosen to leave out some of the agreed to necessary information. The information they must gather by regulation is on your account application. This may well differ from the information generally agreed to as a minimum for an appropriate investment policy. Categorized as: Personal Situation, Financial Situation, Personal and Financial Goals and lastly Attitudes toward Risk.

• Personal Situation is information like: Age, Marital status, Number of dependants, Employment details (type of work, job stability). Investing experience (number of years, types of securities), If married, all of the above information for the spouse. Most applications ignore: If married, who makes the investment decisions?, Educational background (certification, postgraduate).
• Financial Situation: Amount of investable assets, Annual income from all sources (other than investment income), Type of investment accounts (cash, margin, RRSP, RESP), Real estate (home, cottage), Where are the boxes for: Annual savings target (or a list of annual expenses) or Other investments (company pension, employee stock options).
• Personal and Financial Goals: Desired retirement age, Desired retirement income, Plans for major expenditures (vacation property, paying for a child’s education, annual vacations), Gifting of assets (during lifetime or on death). It seems here your goals are reduced to time horizons on the application. What percent of the account should be short, medium or long term investments? I guess that it is somewhat reassuring that it must add to 100% in total. Were these questions really answered or asked? Attitudes Toward Risk: How the client defines risk (income shortfall, delayed retirement, less wealth) or the Client’s willingness to take on risk. Maybe that is in the area of the application where it asks how you would like to mix your investments but is that really the same thing?

Seriously, is that really all that an advisor needs to “Know Me”? Good financial planning seeks to remove the short comings in this area. Knowing you well is essential to the setting of Objectives and Constraints. Detailing them in an Investment Policy Statement and a Strategic Asset Allocation will assure you that YOUR PLAN will be properly executed. Getting off to the right start is always a wise way to proceed. Please PLAN responsibly and arrive alive.

Execution

Select Securities. No problem here. I would guess that your advisor is always ready to buy or sell. Why did I need that Strategic Allocation again? Based on results have you or your portfolio been executed?

Feedback

Widely understood that the Markets should be monitored. But is your advisor monitoring you as well? After all, you are a critical component of the plan and its success. Next is appraising the portfolio. If this was truly being done adequately would you still be constantly asking “how are we doing?” Most firms still do an incomplete job of reporting how the household is doing now, let alone, over history. Many times the information reported is how they did, not how YOU did. Lastly, is any of this resulting in your portfolio being rebalanced? Rebalanced regularly (what interval) or because of deviation from norm (by how much). How can good decisions about adjustments be made without clear and complete information? Understandable long term performance appraisal is essential, yet what you are probably getting is unreadable monthly or quarterly statements, not summarized by family nor related back to the plan. What exactly are we measuring if not the results of the plan or more plainly, did we meet the objectives?