I am looking for an independent appraisal of my portfolio. What would you suggest?
This is one of the most common questions I get from readers. Some are working with an adviser and want a second opinion because their portfolio never seems to gain ground. Others are do-it-yourselfers who want to make sure they're on track. Still others have inherited a portfolio, or taken over the finances from a spouse, and aren't sure where to begin.
I don't provide specific investment advice to individuals – I'm a financial journalist, not an adviser or portfolio manager – but I have looked at some of these portfolios myself and noticed several common themes.
In many cases the fees are too high, often because the portfolio is stuffed with mutual funds whose management expense ratios (MERs) are north of 2 per cent. Other common problems include a level of risk that is inappropriate for the person's age, a scattershot approach to stock-picking that lacks a clear strategy, or the presence of complex products that generate fat commissions for the adviser but which the client doesn't understand.
Derek Moran, a fee-only registered financial planner in Kelowna, B.C., spends a lot of his time reviewing portfolios and has seen all kinds.
"It's probably half of my work. I see beautiful stuff and I see junk," says the president of Smarter Financial Planning. He charges $200 to $400 for a simple review, which includes an analysis of the portfolio's fees, asset allocation and diversification. If the client is working with a professional, he also reviews that person's credentials.
Higher-level financial designations, such as chartered financial analyst or portfolio manager, require years of study, whereas the requirements to obtain a mutual fund or insurance sales licence are less rigorous. The type of designation often determines the sorts of products the adviser recommends.
If the portfolio is problematic, Mr. Moran gives the client a couple of options.
"The first thing I say is, 'You can manage it yourself if you want,'" he says. For do-it-yourselfers, he recommends a conservative dividend approach. For clients who want the expertise of a professional and have about $500,000 or more in assets, he recommends seeking out a licensed portfolio manager. Unlike advisers who generate commissions from stock transactions or mutual funds, portfolio managers charge a fee based on the size of the account.
He prefers portfolio managers because there are fewer potential conflicts of interest and the costs can be lower. Fees start at about 1.5 per cent annually but can be well under 1 per cent for accounts worth several million dollars. (For tips on selecting a portfolio manager, see the Portfolio Management Association of Canada's website.)
Jason Heath, a fee-only certified financial planner in Toronto, prefers not to review a client's portfolio in isolation. He takes a more comprehensive approach that includes tax planning, estate planning and cash flow needs. The cost for this generally ranges from $1,500 to $2,500.
"When I start working with a new client I will always take a close look at their portfolio," he says. "One of the first questions I'll ask a client is how are they paying their adviser. Most of them don't know."
Most advisers do a fine job, he says, but problems aren't uncommon. For example, he occasionally sees large portfolios invested entirely in mutual funds with hefty deferred sales charges. "The adviser may be doing the best job they can but because they only hold a mutual fund licence they can't build a portfolio any other way," Mr. Heath says.
In other cases, portfolios are too risky. For instance, a woman came to him in 2008 after her husband had died. She described herself as a "very conservative" investor, yet her portfolio was 95 per cent in equities on the recommendation of her adviser. Mr. Heath ended up introducing her to a new adviser who came up with a more suitable asset allocation.
With a portfolio review, you want to make sure you're getting unbiased advice, which is why a fee-only planner who doesn't sell investment products may be a good place to start. For more information on choosing a fee-only planner see my column here.