SOURCE: Moenio


April 27, 2016 10:00 ET

Rattled by Volatile Markets, Investors Ask Advisors Tough Questions -- Often the Wrong Ones

Instead of Asking About China or Oil Prices -- or Letting Advisors Tell You Stories About Them; Make Sure There's a Long-Term Plan, Focus on Personal Goals and Tie Fees to Results to Get a Clear Look at Performance, Says Consulting Firm Moenio

MIAMI, FL--(Marketwired - Apr 27, 2016) -  Market volatility has investors rattled, and many are rushing to re-evaluate their investment advisors and their portfolios.

But too often, they are asking the wrong questions and focusing on the wrong metrics. They follow conventional wisdom and obsess over global trends such as China's downturn and the sharp decline in oil prices. They ask about performance against broad benchmarks like the Nikkei and the Dow.

Instead, investors should use short-term volatility as an opportunity to evaluate their advisor's long-term strategy and communications style. But to judge performance, they should stay focused on a three- to five-year time horizon, use benchmarks that reflect their personal strategy and risk tolerance, and rely on the "fee ratio" -- a comparison of costs to gains -- to determine if the advisor is producing both superior results and fair value.

The questions to ask an advisor are not "what are you doing about China?" but rather "what's your strategy, what's your approach to volatility, and what long-term results do you produce?"

That's according to Moenio, a client-advisor advocacy firm that evaluates advisors on their clients' behalf -- whether finding a new one for a client, evaluating the current advisor or providing ongoing monitoring. In a new commentary, Moenio explains what's wrong with a client's normal approach to portfolio performance evaluation, why a better approach is needed, and the steps investors should take to make better decisions about their advisors and portfolios.

"Market news and analysis obsesses over global shocks like China's downturn, emerging markets, and the impact on major indices. So it's only natural that investors think about those issues, especially in times of stress," says Kevin Neal, CFP®, ChFC®, CLU®, founder of Moenio. "Advisors like to talk about them too. They are good storytellers and like to share compelling information about how global events and business trends might affect your environment.

"But in our experience it's far more useful to ask simpler questions," he continues. "'Is my advisor, or one that I'm considering, truly one of the best in terms of performance against my individual goals? And what will be the total net return from my relationship with this advisor?'

"We don't mean an investor should ignore volatility -- but it's best not to be distracted by it," Mr. Neal says. "The best approach is to use volatility as an opportunity to evaluate the advisor's long-term approach, and to understand how the advisor communicates with investors. What did the advisor do about the current volatility? Advisors often tell clients their portfolio is 'set up' to manage risk. Did the portfolio perform 'as advertised' against the right benchmarks? What is the advisor telling you right now that you can 'trust but verify' in six to 12 months? Or, what did he or she tell you six to 12 months ago that you can verify today?"

Investors should take objective steps to evaluate advisor performance

According to Mr. Neal, investors who want to evaluate an advisor -- current or prospective -- should:

  • Conduct a qualitative "gut-check" overview to confirm that the advisor behaves the way a top advisor should. "The best advisors have certain qualities in common," Mr. Neal says. "They are consistent -- their advice is focused on client needs and goals. They communicate -- they are open and patient with clients. Both sides learn from each other and investor confidence grows. And they are proactive -- they anticipate client needs. They save their clients time and money and reduce their stress. If the advisor you're considering doesn't demonstrate these qualities, move on to another that does.

    "The current market environment is a perfect opportunity for clients to evaluate their current advisor," Mr. Neal says. "During times of extended volatility, meaning more than a few weeks, an advisor's communication to clients is extremely important. The advisor should be proactive in reaching out to the client to provide assurance that the individualized strategy is the right one."

  • Review performance objectively against the investor's goals, relevant benchmarks, and risk tolerance, not against broad indices. "To their credit, advisors generally choose the right benchmarks -- but investors often don't," Mr. Neal says. "Too many investors are swayed by news reports and analysis -- they are too inclined to judge against a broad benchmark like the Dow when the advisor is trying to build a risk-adjusted portfolio. As a client, you need to be very specific about goals and risk tolerances when discussing benchmarks with advisors. Benchmarks should be calibrated for risk and should apply both to the overall portfolio and to each investment.

    "Defining the investor's goals requires a long time horizon. We look at one-year, three-year, and five-year periods with greater emphasis on the three- and five-year periods. This shows that the advisor can deliver results consistently, not just under limited market conditions. Market risks can skew results in any one-year period -- as the current state of the market shows. Viewing the short term can create needless anxiety -- or conversely, unrealistic expectations."

  • Review how the advisor selects one investment vehicle over another (e.g., a mutual fund over an ETF) and product or individual manager over another (e.g., Brand X ETF over Brand Y ETF). "Knowing how an advisor makes decisions is important. You can establish a track record for each advisor through his or her past choices -- it's in the statements for current and past clients. If the advisor is choosing correctly, he or she is one of the best -- but you also want to understand his or her choices and how these impact current and future clients."

Are advisors producing results in line with the stated goals and at fair value? The "fee ratio" gives the answer:

  • Examine fees and the "fee ratio" to determine how much you are paying and what investment performance you are getting in return. "Advisors don't always like to talk about fees -- unless their fees are a selling point," Mr. Neal explains. "But fees are tax-relevant and advisors have to disclose them on request. Once you know the fee, you can measure it against industry averages.

    "You can also use it to compute the 'fee ratio' -- that is, a calculation of your total cost (fees paid) to the net return (what you earned) over a three- and five-year period.

    "The fee ratio is the final element in our evaluation process. It gets to the heart of the matter -- it tells us about value. How much are you paying for your performance?

    "The fee ratio can be difficult to compute -- you need to account for compounding, the potential impact of multiple fees from different accounts, and the net and gross numbers on an extended time horizon. An accurate fee ratio is best developed with the help of a professional. But the concept is very simple -- what are you paying out of pocket for your results?

"The fee ratio is a different way to think about fees," Mr. Neal says. "Advisors like to present fees as a percentage of assets under management, and investors think about them that way as well. But that's not helpful or useful information. The fee ratio ties fees to performance and completes the total picture.

"The need for objective, investor-specific metrics and systematic evaluation is great, not only because of market conditions, but also because of the sheer number of advisors out there," Mr. Neal says. "There are more than 600,000 registered advisors in the United States. With numbers like that, how do you know the one you've chosen is truly one of the best in terms of outstanding performance and client service? Many of them are very good, but how many are at the top? And the fact is that the best of the best don't advertise. You have to seek them out, which makes the challenge even greater. But by taking a systematic approach and not getting distracted by short-term volatility, you can be highly confident that your advisor will actually produce the results you need and want."

For a copy of the Moenio commentary, an interview with Kevin Neal or a byline article, please contact Katarina Wenk-Bodenmiller of Sommerfield Communications at (212) 255-8386 or

About Moenio
Moenio is an unbiased, independent consulting firm that helps high net worth individuals, families and organizations find, evaluate and monitor investment advice. The firm is based in Miami, Florida.

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