The Year-End Investment Review for Individuals and Families

Tuesday, 29 October 2013 Posted in SpringReef Insights

Your Guide to a Productive Meeting with Your Financial Advisor

SpringReefA year-end investment review with your financial advisor is an important part of the wealth management process. Not only does this annual practice allow you to assess the health of your finances and adjust your financial goals, it also plays a vital role in the management and protection of your wealth.

As part of this process, a best-in-class financial advisor should provide you with your true financial performance versus appropriate benchmarks, discuss the year’s achievements and challenges, and offer you a detailed overview and justification of all fees. He or she should also discuss with you any changes to your personal situation, address any concerns you may have, and help you to develop a constructive plan of action for the coming year.

Unfortunately, not all financial advisors employ this best practice. Less-qualified professionals use the year-end review, if they hold one at all, to focus mainly on the positives, glossing over concerning issues in an effort to keep your business for yet another year.

Regardless of the approach your advisor follows, with a bit of preparation, you can ensure that you get the most out of your year-end review. By knowing what questions to ask and telling your advisor in advance what you’d like to cover, you will greatly improve your probability of receiving a comprehensive and transparent view of your financial situation.

Here are the key questions we recommend asking your financial advisor:

1. How did I do?

  • How did my portfolio perform, both overall and versus a blended benchmark1?
    Your financial advisor should be able to provide you with a summary of your total portfolio return (net of all fees), as well as a comparison of your portfolio performance versus a blended benchmark. The data you receive should at the very least reflect a full-year period, although annualized performance from the last three and five years is preferable.
  • What were the specific causes of over-performance or under-performance?
    Regardless of whether your portfolio over- or under-performed, it is important to understand the specific reasons behind the outcome. Ask your advisor to review performance (overall and versus the blended benchmark) for each asset class and investment category (i.e. separately managed accounts, mutual funds, hedge funds, etc.). Was the over- or underperformance broad-based or highly-concentrated? Was it an aberration or was it consistent with prior results?
  • What were my total all-in fees this year, including advisory fees, mutual fund expense ratios, transaction charges, and fees paid to 3rd-party asset managers and custodians?
    Transparency around fees is an industry-wide problem – all too often, advisors fail to disclose the multiple layers of fees their clients are paying. Make sure to ask for your ‘total’ or ‘all-in’ fee to get an accurate picture of your expenses. Additionally, since fees are often quoted as a percentage or in basis points2, make sure to translate the figure your advisor provides into actual dollars. While 0.50% or 50 basis points may sound small, converting the figure into its dollar equivalent will allow you to better assess your advisor’s value based on your total out-of-pocket cost.

2. What should we change?

  • Identify significant changes to your personal or financial situation.
    Significant changes in personal circumstances such as buying a second home or assuming financial responsibility for a family member can have important implications for portfolio construction. Communicating meaningful changes to your financial advisor regarding your lifestyle or cash flow is critical when it comes to your asset allocation, portfolio risk and overall financial health.
  • Are there any adjustments you recommend to my asset allocation or investment holdings?
    If your financial advisor recommends a shift in your asset allocation or an adjustment to your investment holdings, make sure he or she provides you with a clear explanation of the modifications. Changes should typically be based on shifts in your personal situation or risk tolerance, your investment performance or because of the overall market outlook. Remember, for many advisors and firms, change drives revenue – verifying the reasons behind sales and purchases in your portfolio increases the probability they will be made for your benefit.
  • What are the tax ramifications of the proposed changes?
    For taxable accounts, be sure to review any planned sales with your tax advisor. You may be able to take advantage of timing or pairing opportunities to lessen your tax liability.

3. What is my roadmap for the coming year?

  • Finalizing a plan for the upcoming year is a critical component of your year-end review. Agree upon a roadmap with your financial advisor, both in terms of your investments and your communications plan. At a minimum, we recommend quarterly updates and a formal annual review. Also, make sure your advisor understands your expectations regarding the content of reviews going forward. We hope the questions above will serve as a valuable guide in this respect.

1 A blended benchmark is a combination of appropriate indices weighted to match the actual mix of assets in your portfolio. It allows you to more accurately and concisely assess the relative performance of your portfolio and the contribution of your advisor’s investment selection.
2 A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

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