Some Constructive Feedback on the Know Your Advisor Tool

Rob Carrick wrote an article over the weekend asking for his readers to consider visiting this site and to provide feedback on the KYA (Know Your Advisor) tool. On the blog, there were some very constructive suggestions and I received some private emails as well which were great. I’ll post some here and provide my responses for all to see. I want to thank everyone for the feedback. I think there are some who believe it is a finished tool – it is not – and every question is subject to modification or removal and I might add other questions.

Constructive Suggestions/Comments:

1. I had an advisor email me to offer kudos, and he and his team intend to use and promote the tool. He suggested that the question about sales contests is a tough one because there are many advisors who work at a dealership who philosophically don’t participate in contests but just happen to keep on doing their business and may end up winning things, or different areas of the firm have contests but they specifically don’t pertain to the advisors division, etc.

My response: I thought about this long and hard. I think I will remove the question because sales contests are not the reason any advisor chooses to use one dealership over another. There are so many things to consider when choosing who to run your practice through, and I’ve never met an advisor who has said “I’m going to XYZ Financial because they have the best BBQs”. The decisions to join a dealership are based on many other criteria (technology platform, product platform, etc.). It’s possible that the dealership that is the best fit for an advisor might hold contests, and they might not. But because it is not a decision factor, it would be hard to penalize an advisor for something they don’t have much control over.  Further, sales and incentives are as ubiquitous in the financial services as much as with many other industries – perhaps consumers in general just need to be aware that many behaviours in many workplaces have incentives of some shape or form.

2. Advisor Compensation – Advisors who are compensated using load funds is a broad stroke: Some advisors use Front loaded funds and opt to choose 0% up front and collect an annual trailing commission as their main source of income, and some do that because they cannot offer fee-based accounts. Also, some advisors fall into a blend of categories – for example a bank branch advisor will most likely earn a base salary with a bonus based on performance.

My response: I’ve changed the question to simply ask if the advisor will speak openly about fees charged for their preferred method of compensation and if they will discuss all the options available to investors. Better to let the advisors do the talking as to which they prefer and why. I think it’s important for an investor to determine if they are getting good value for what they pay and hopefully they will interview more than one advisor to get different perspectives. Discussing all the nuances in the scorecard would be time consuming – and there are many references available on advisor compensation elsewhere. Part of the appeal of this scorecard is to help quickly identify bad apples, not tell you who you should work with.

3. Options licensing question: a few advisors mentioned that the use of options isn’t a cut and dry question, as some investors cannot understand them.

My response: I’ve omitted the question as I agree: many investors who use an advisor don’t really understand options (unfortunately) and I’ll leave it to the individual advisors who are option licensed and use it in their practice to promote the benefits of options as part of their own value add, for differentiating themselves from the competition.

4. Award some points for undergraduate or graduate degrees in finance or accounting.

My response: yep, I just missed doing that the first time ’round. Now I feel validated for asking for feedback even more! I *knew* I’d miss a simple one on the first go at it.

5. Award some points for goal setting in the financial planning process.

My response: agreed – I added in a question to ask the advisor if they will dedicate time to discussing goal setting for various areas: retirement, education funding, lump sum expenditures, etc.

6. Award some points for experience in the industry.

My response: done.

7. Award some points for the drive and passion of the advisor.

My response: Can’t – too subjective. Most advisors are by nature, quite driven. True passion is rare and I think you’ll probably detect it when you see it.

Other Comments Worth Mentioning

1. You have a conflict of interest – you work for a mutual fund company.

Yes, I work for Pro-Financial Asset Management which manages a suite of Fundamental Index Mutual Funds. Nothing I do on this blog is reflective of the views of my employer. Two questions in the scorecard pertain to indexing and by their nature, the questions seem to promote indexation. 40 years and 1000’s of academic papers support the inclusion of indexation strategies in many portfolios. The quiz doesn’t say you should go out and ask your advisor about “our” funds, nor does it penalize an advisor for NOT using index funds in any way.

If you are worried about how objective or sincere I can be, please feel free to read the 750 other posts on this blog and you’ll figure it out. I suppose I could just TELL you I think I’m being objective, but why would anyone take that at face value?

2. You’re in the industry, you set it up so that you would’ve scored 100%

I would’ve scored 80% on the first draft and 85% on the second – but I am not a financial advisor anymore, nor do I have any current plans to become one again. Besides, as I’ve made clear (hopefully) this scorecard is not a tool that will unequivocally tell you who to pick as your advisor, it would only be used to aide you in your overall decision making process.

What’s Next?

Okay, so we’re getting closer to the final draft. Take a look at the updates (they are the same quiz, just in different formats: one online and one that can be printed out):

Online Quiz

Printable Scorecard with Scoring Key

Interested in your feedback on the changes, or if you’ve come up with anything else that should be addressed. Cheers!

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 11 comments
  • TJ Machado

    I see no inclusion on the advisor's ability to formulate a holistic plan that covers the primary pillars of:

    Debt Management, Risk Management, Education Planning, Retire Planning, Investment Management, and Estate Planning.

    BTW, there is no link on this page to Login.

  • Patrick

    Please don't take out the question about compensation. I think that's one of the most important ones! If an advisor loses points on that question, there are plenty of others where they can make up the points.

    I don't think it's enough that an advisor just “speak openly about fees” because investors don't necessarily understand all the fee options and how they can warp the behaviour of even a well-meaning advisor. Just speaking about it doesn't help a lot.

    It's OK that advisors may score low on that question today, but advisors who do get ethical compensation should be rewarded. Also, it sets up the right motivation for future advisors wanting to score highly on this tool to choose their compensation scheme ethically.

  • Preet

    Hi TJ – I'm confused: a link to login to what?
    As for the other part of your question – I'll make it more clear in the next update.


  • Adam Butler

    Hi Preet,

    As an Advisor, I think this is a phenomenal initiative. Recent studies about investors' sentiment toward their advisors suggests the following:

    1. Investors have lost trust, and are looking for new advisors
    2. Investors do not know how to qualify advisors or their firms
    3. Investors who have lost trust with their existing advisor, but don't know how to qualify another one are likely to disengage from the investment process, to the detriment of both clients' and advisors generally.

    A few other points:

    1. Many, if not most, clients would benefit from a genuine buy and hold strategy using inexpensive indexing options, such as ETFs. Unfortunately, a mountain of evidence has emerged over the last decade from the behavioural economics field, and from studies of actual investor behaviour from firms like Dalbar, demonstrating that investors are unlikely to stick buy and hold over the full market cycle. Dalbar's most recent study (2009) showed mutual fund investors received 25 year returns of just 1.5%, which compares very poorly with the 10+% they would have received from holding U.S. stocks. The vast majority of mutual fund advisors advocate buy and hold, but clients and advisors don't stick with this strategy over the long term, even when they know they should.

    2. The best we can say about “Buy and Hold” is that it is the worst possible strategy for most people, except for almost all the other common solutions. Buy and hold actually provides very little consistency of returns, even over time horizons as long as 30 years. Shiller's data from Yale show that rolling 30-year real returns to investors since 1870 have ranged from 3% to 10% over 95% of periods. The difference between 10% and 3% over a planning horizon is the difference between leaving a multi-million dollar legacy at death, and running out of money completely in 7 years. This is an unacceptable proposition for investors, and a disappointing best practice for the wealth management industry.

    4. Unfortunately, active mutual fund investing is unlikely to improve investors' outcomes. Bottom-up stock picking is practiced by the vast majority of advisors, as well as most mutual fund and managed account managers. Work by CPMS and other quantitative research shops clearly show that few bottom-up value or growth measures deliver excess returns to investors. For example, PE, P/B, P/S, yield, and quick liquidity ratios offer virtually no risk-adjusted returns to investors if used for stock selection. First derivative measures such as growth are not much better. Second derivative measures such as earnings momentum worked for a while, but have delivered less value in recent years, probably due to broader use.

    So what does work? According to CPMS, the top factors contributing to excess returns, and the ones with the greatest long-term consistency, are:

    1. 9-month price momentum
    2. 3-month price momentum
    3. Analyst earnings estimate revisions (many analysts raising earnings estimates drives prices higher)

    CPMS portfolios have demonstrated the power of these factors over many years. Unfortunately, the vast majority of mutual fund managers simply use research from their own firm's analysts, with standard bottom-up relative value analyses, despite the lack of evidence supporting this methodology. It is no wonder that 90% of mutual fund managers underperform their benchmarks over a full market cycle.

    4. For those advisors and clients willing to think outside the box, there is ample evidence supporting the potential value of certain active ETF strategies to both limit risk, and enhance returns over the intermediate and long-term. These strategies are structurally difficult for most advisors to adopt, because effective execution require a discretionary license. Further, most institutions apply very long-term strategic asset allocations, and have access to alternative managers with broader asset-class mandates, such as commodities, timber, international real-estate, infrastructure, etc. So these strategies are unlikely to experience the alpha decay experienced by most traditional strategies, at least until the investment business undergoes majo structural changes.

    5. There is a difference between financial planning and strategic wealth planning. Financial planning is largely an investment exercise to achieve goals at various time horizons, such as paying for kids' educations, financing retirement, or leaving bequests. Strategic wealth planning is largely and accounting a legal exercise that involves insurance and investment experts to effectively structure financial assets to minimize taxes and transfer wealth to various stakeholders. The two require different skill-sets; wealth planners are often unfamiliar with the actuarial techniques and investment opportunities that skilled advisors use to build robust financial plans. These techniques are taught in some detail in comprehensive financial courses like the CFA. Financial planning courses tend to focus on strategic wealth planning, while making many dangerous assumptions about the investment inputs. I would argue that most advisors are ill equipped to deliver a strategic wealth plan without the collaborative inputs of legal, accounting and tax counsel.

    To address the points above, might I humbly suggest a few new questions for your KYA survey:

    1) Do you embrace a Buy and Hold approach, or do you believe in active management?

    1a) If you embrace buy and hold, do you advocate low-cost indexing options such as ETFs?

    1b) If you suggest a strategic allocation to low-cost index funds or ETFs, what other services will you provide to justify your fees?

    1c) If you advocate a more active approach, what evidence do you have that supports your approach? How does the approach look after fees and taxes versus passive index Buy and Hold?

    2) If you advocate an indexed buy and hold approach, how do you suggest we manage the wide range of possible returns over my planning horizon, and the impacts to my financial goals?

    3) Do you apply an approach to financial planning that assumes consistent annual returns, or one that acknowledges the high degree of variability in market returns?

    4) What is your attitude toward risk? Do you feel it can be actively managed? If so, how?

    I have many thoughts on this, Preet, and would be keen to discuss this further. I hope this helps, and sincerely look forward to your next draft. I believe you are doing investors a great service.


  • Ryan Martin

    This is great; and refreshing to see coming from the industry and shared online. This tool and information can help a lot of people.

    The financial industry needs to realize there is a huge shift in information happening, where the public will have more power and choice. It will only take a few tweets or facebook shares to finish a corrupt advisor's career. One only needs to look at the Huffingtonpost to see what I mean; the news there is driven by the people; this will soon be everywhere. Keep up the great work Preet. Note: I found you via the Globe & Mail blog poll (Congrats!)

  • Jo Anne

    I have my CFP, FMA, FCSI and RRC and you don't consider me fully qualified? I am a bit concerned too that you expect Financial Advisors to have their life insurance license….I work for a bank, so that's legally impossible.
    Aside from those two issues, I like the quiz and will encourage clients to use it.

    • Eldean

      Hi Jo Anne,

      Are you implying that life insurance does not play a vital role in Estate & Tax Planning or do you have a problem with the fact that you would have lost points on this question?

      Eldean Dickenson

  • Eldean

    Good evening Preet,

    Great tool! Would you be willing to insert a question for financial advisors that have a specialization? I would also encourage you to look at Q2 again. It appears that you lose points if you fully discuss fee options. Otherwise great work and thanks for looking out for the public on this important issue.

    Eldean Dickenson

    • Preet

      Hi Eldean, thanks for your comments. I’ll look at Q2 again, as I may have just made a typo. Adding something for a specialization makes sense too. Cheers!

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