Reprinted courtesy of the National Post
by Tom Bradley
How did you find your advisor or portfolio manager? Was he your Dad’s broker or a recommendation from a friend? Did your bank manager guide you?
When picking a person or team that you hope to work with for many years, there should be more to it than that. At Steadyhand we recently changed the manager of our Global Equity Fund. This difficult decision was the result of an extensive evaluation process by my partner, Salman Ahmed, and me. We used a framework called the Seven P’s to help sort out all the information that came from many interviews and slide decks.
When assessing your current advisor or looking for a new one, you too may want to look at People, Parent, Philosophy, Process, Price, Performance and Passion.
People is at the top of the list, specifically the quality and continuity of the team. Financial models, algorithms and big research teams all contribute to investment returns, but ultimately, it’s the final decision-maker who makes you money. Your advisor should have a skill set that matches up with what you’re asking her to do – i.e. financial planning; stock picking; portfolio construction; trading; and/or administration.
When assessing managers, an important ingredient for me is ‘accumulated regret’. I want someone who’s survived bear markets, periods of poor performance and corporate disruptions.
Parent refers to the work environment and culture of the firm (I know, I stretched to make it a P). Your team needs resources, support and freedom to ply their trade. There must be a fit with the company’s philosophy and business practices. For instance, if your advisor will be forced to further the corporate agenda by pushing new products and cross selling other services, you might want to look for someone else. Your best interest has to be their number one priority.
I look for firms that have a stable team who invest in the same securities they’ve bought for my portfolio.
Philosophy speaks to how the money is managed. There are many ways to do it – stock picking; buy and hold; growth; value; indexing; macro strategies; frequent trading; all dividend stocks; all Canadian; or globally diversified. You want to know what the advisor’s approach is and if it fits with how you think.
It’s important to note, philosophy isn’t about products, but rather how securities are selected and put together in a cohesive portfolio. A preference for mutual funds or ETFs reveals nothing about an advisor’s investment philosophy.
Process is how the philosophy is implemented. Is it one person who makes the decisions or team consensus? In either case, the execution should be repeatable trade after trade, year after year.
Price should be an important factor in your decision. In an environment where interest rates are two to three per cent and stock returns may be lower going forward, you must be receiving value for your advice fees, trading commissions, fund management fees and service charges. Saving a half to one per cent over decades makes a big difference.
Despite initiatives by the regulators, I still find that most investors don’t know the full amount of what they’re paying and what service they’re entitled to.
Performance is another area where investors are often in the dark. In the 7P’s framework, it’s long-term returns we care about. Has the team generated wealth for their clients over a full cycle (good and bad markets)? If the sales pitch emphasizes this year’s returns or the latest stock win, you need to do more digging.
Passion is not one you’ll find on many lists, but it’s important to me. The investment industry is full of smart people who are technically proficient and present well to clients, but what I’m looking for are investment geeks, not sales people. Managers who are consumed by what they’re doing, constantly curious and losing sleep when my returns are lagging.
My team accuses me of P proliferation. Your list may be more compact, but it should cover all the same elements. There are no guarantees when picking an investment professional or team, but these factors are better predictors of future returns than what investors often use — a casual recommendation, glossy brochure or good recent returns.
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