The letters after a financial advisor's name can tell a lot about what he or she does, says Marc Stern, who has designations of MBA, CA, CIM, DMS, FCSI, and Pl.F. on his business card.
A vice president and portfolio manager at PWL Capital Inc., in Montreal, he confides, "the letters don't tell the whole story. You also want to know who awarded them and if the bearer is licensed in his specialty, who the licensing authority is and if the person is in good standing with that authority."
Shopping for financial advice without having a focus on what you need is like going into a supermarket without a shopping list or any idea of what to buy.
An initial road map can be put together by a financial planner who will have an overview of financial resources, present and future income needs and suggestions for how structures such as family trusts may be used.
The majority of planners, designed by the initials CFP (for Certified Financial Planner) or RFP (for Registered Financial Planner) work on commissions received by the mutual funds they sell.
A minority of planners work by the hour as "fee only" advisors. Their fees range from $150 to $300 per hour, says Adrian Mastracci MBA, RFP, a fee only planner and portfolio manager who heads KCM Wealth Management Inc. in Vancouver.
Some fee only and commission planners are registered to sell securities.
At the ground level, where the cost of entry may equate to the cost of a few units of a mutual fund, with a frequent $100 minimum to open an account, management expertise is packaged with the funds sold. Management fees average 2.4% of assets for Canadian equity portfolios.
Mutual fund companies, including banks, offer asset allocation services and stage of life portfolios in solutions that are mostly off the rack.
For investors who have $500,000 or more to invest -- though the threshold varies from one advisor to another -- there are custom tailored solutions. The costs are usually billed outside of the assets managed. Fees range from 1.0% or 1.5% of portfolio value and decline according to the amount of money handled to as little as 0.5% or even less for portfolios with $10-million or more of assets.
Some firms charge a minimum fee. KCM Wealth Management, for example, charges $6,000 per year, which would be a substantial 6% of a $100,000 portfolio. Typically, KCM handles portfolios with $300,000 or more.
The fee wraps in not just portfolio management, but retirement planning and other work done by financial planners.
At most specialty portfolio management firms, investing will often be the work of CFAs (Chartered Financial Analysts) or CAs (Chartered Accountants).
The larger and the more diverse the portfolio, the wider the range of specialists who may be called into provide direction.
Bond managers, who are usually CFAs, can be specialists in corporate bonds, government bonds or global bonds. Stock managers may also be specialists in various industries. As well, accountants may be needed to consult on and manage tax liabilities.
Custom professional management costs less than average mutual fund fees. At Portfolio Management Corporation in Toronto, managing director and portfolio manager Norman Levine, MBA, CFA, explains that the majority of managers with discretionary authority have minimums of $500,000 or $1-million for clients.
Some advisors, including his own company, allow clients in one family to pool their resources in order to cross the threshold.
Management fees per $1,000 managed tend to decline with the amount of money under management, Marc Stern explains.
Moreover, he notes, many management firms do not carve their fees in stone. Many will negotiate if assets are under their entry limits.
For the client, hiring managers requires judging competence and fee efficiency.
Fees decline with amount of money managed, so chopping up a portfolio and sending bits to many specialists may cause average fees and total fees to rise. That raises the bar when it comes to judging if the advice is worth the cost.
In choosing managers and advisors, it's really wisdom that counts.
Looking at letters after a name, while helpful, is only a beginning. References, in-person meetings and evidence of ability to cope with risk and return are what really count, says Marc Stern. "Honesty, ability and results are what makes a relationship work," he says.
In the end, dividing up management of a portfolio among a financial planner, a stock portfolio manager and a bond manager, can prevent specialists from doing their best work. "If you have too many advisors, then you wind up as an allocator and even, ironically, as a sector picker," says Derek Moran, RFP, who heads Smarter financial Planning ltd. in Kelowna, B.C.
His advice -- keep the management job as simple as possible to save on fees and complexity.
(c) 2010 The Financial Post, Used By Permission