While it is important to review an advisor’s past performance, if you are not aware of the dangers outlined in the following article, it is easy to be misled.

How to Avoid Choosing the Wrong Investment Advisor

by Kim Renners
visit Physicians Money Digest to view the complete article

The volatility of the market returns along with the cracking of the Wall Street foundation has left many uncomfortable with the idea of just “staying the course.” Before you switch firms, or advisors, here are some important considerations.

The Dangers of Reviewing a Firm’s Past Performance

A common mistake individual investors make when evaluating or selecting a financial advisor is to overrate the importance of an advisor’s past performance. There are reasons why this approach is flawed. Let’s examine some briefly:

The Time Frame May Be Too Short. When looking at an investment “track record,” many clients will ask for gross returns on a 1-year, 3-year and 5-year basis. This is simply not enough data to make any concrete conclusions about an advisor’s skill vs. randomness or even dumb luck. Even 10 years of data may not be enough.

Comparisons of Results Likely Not “Apples-to-Apples.” Even the common question, “How did your portfolio perform (last year)?” can lead to misleading answers in cases where portfolios are designed for individual clients. For example, many clients have customized portfolios based on their risk tolerance, age, time horizon, tax bracket, objectives and a variety of other factors.  As a result, it is entirely possible that Client A could see returns of 3%, while Client B could boast a gain of 20% over the same period. Both of these investors could be equally satisfied — or not — and neither of these results may give you any helpful advice about your particular situation. Only in situations when two investors have very similar goals, circumstances and objectives is any comparison worthwhile.

Past Performance is No Guarantee of Future Results. Anyone who has ever watched an investment firm’s commercial on TV, listened to an ad on the radio, or read one in a newspaper or magazine is familiar with the phrase “past performance is no guarantee of future results.”  While this is required by the firm’s legal compliance department, and can be easily discarded as “legalese” by consumers, it is crucial for investors to understand. To illustrate one aspect of this principle, examine the chart below showing the returns of leading investment asset classes over the past 28 years.

Factors for Choosing a Financial Advisor

Independent Custodian. Ideally, an investment firm does not custodian, or hold, its clients’ investments in the firm. Rather, the firm should have arrangements with a number of the largest independent custodians (such as Charles Schwab, TD Ameritrade, etc.) to hold their investments for safekeeping, while the investment firm manages the accounts. This “checks and balances” arrangement prevents the insular secrecy that allowed Madoff, Stanford and other criminals to operate.

Client-Aligned Fee Model. In addition to a transparent business model, you want to look for a firm that has a clear fee schedule. With an “assets under management” (AUM) model, advisors charge a clearly defined fee (typically a percentage of AUM). Contrast this with the traditional, convoluted transaction-based model that most brokers utilize, where a client pays based on trades in the account — regardless of whether the trade added value or not. In a fee-based model, not only do clients understand exactly what they’re paying, they also know the firm’s interest — seeing the portfolio increase in value — is the same as their own. The more money in your portfolio, the more money the firm earns.

Your Biggest Expense? It’s Not Fees

Many investment clients focus primarily on management fees and expenses when evaluating advisors. While such costs are important, for most physicians, the annual fees might range from 50 basis points (0.5%) on the low end to 300 basis points (or 3.0%) on the high end. Instead of haggling over fees, individual investors need to focus on their largest expense: Taxes.

The cost of federal and state income taxes, and capital gains taxes, on a portfolio depends on many factors — the underlying investments, the turnover, the structure in which the investments are held, the taxpayer’s other income and state of residence, and other issue. For higher-income investors such as physicians, taxes will nearly always be high. To gain perspective of how much taxation reduces your returns, consider this one statistic: Over the period from 1987-2007, stock mutual-fund investors lost, on average, 16% to 44% of their gains to taxes, according to a report on CNN.

Given that some investors are losing up to half of their gains to taxes, you’d think this would be a focus of value-added investment firms. Unfortunately, you’d be wrong. Mutual funds provide no tax advice to their investors, apart from the 1099 tax statements they issue in January. In fact, stockbrokers, money managers, hedge-fund managers and financial advisors typically don’t offer tax advice because they are prohibited from doing so. “Tax advice” could include specific techniques for limiting tax consequences of transactions or more general “tax diversification” in portfolios. As a result of these limitations, most investment clients are not getting the tax advice they need.

With the unraveling of some of the country’s leading investment firms behind us and volatility and tax increases ahead of us, many are wisely re-examining their financial advisor relationships. If you are one of these, be sure to focus on the right factors in evaluating potential new advisors so you make intelligent, well-informed decisions.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

The following article provides a basic overview of the importance of asking for a track record and what to look for from potential advisors.

Getting The Record Strait

by Jack Waymire
visit Worth to view the complete article

How do you know how a financial advisor has performed for his or her clients? By asking for the advisor’s track record-and reading the fine print

All investors ask prospective financial advisors what type of performance to expect from the advisor’s stewardship of their money. Advisors’ responses are sometimes true, sometimes exaggerated and sometimes dishonest. How can an investor figure out what’s true and what isn’t? By looking for the characteristics of track records you can trust-and the warnings for records you can’t.

The Sales Pitch

Representatives and advisors who cannot provide legitimate track records must still convince you they can produce competitive results. They will make sales claims describing the results they have produced for current clients. For example, they may claim they have produced 20 percent returns, using references to back up the claim. But sales claims, even those supported by references, are not legitimate track records. You need …

Disclosure & Documentation

All legitimate track records are based on disclosure and documentation. Disclosure is usually in the fine print, but it should describe the methodology used to produce the track record. Documentation is your record of what is communicated to you before you sign on with an advisor.

Composition of Track Records

The most reliable records are based on the performance of all of the advisor’s portfolios. Second best is a composite of portfolios that still contains a large number of accounts. Be leery of track records based on a limited number of portfolios, which may include only the best performing accounts.

GIPS Compliant

The formula an advisor uses to calculate his or her track record should be in compliance with Global Investment Performance Standards, an industry code established by the CFA Institute.

Third Party Auditors

Independent third parties with no relationship to the advisor or money manager are the best auditors. Beware of unaudited track records and auditors you’ve never heard of.

Investment Expenses

The most reliable track records should reflect all of the fees that would be deducted from your account: advisory fees, money management fees, custodial fees, marketing fees, administration fees and transaction expenses. Expenses can range from 1.5 percent to 3 percent and occasionally even more.

The Free Lunch

Watch out for track records that appear to be too good to be true or an advisor who claims he can produce high returns for low risk. High returns for low risk do not exist.

The Hot Product

Many sales representatives and advisors will show you the performance of hot products (specific mutual funds and hedge funds, for example) and represent the results as their track records. Unfortunately, it’s virtually impossible to know when they began recommending the funds to their clients. In my experience, they usually selected the funds after the performance occurred.

Bottom Line

Some investors feel awkward asking potential advisors for their track records. Don’t. It’s your money.

It can be difficult to navigate the waters of selecting an advisor.  Understanding the importance of a track record is a good place to start.

Does Your Investment Advisor Have a Track Record?

by Howard Aschwald
visit Wealth Management Exchange to view the complete article

With the recent market turmoil, investors are looking for more credibility and transparency from their investment advisors. Many investors have become disappointed with the investment results achieved by their advisors. Their performance doesn’t look like anything they were shown in the presentation made by the advisor when they signed up. Perhaps it’s because the track records shown to them in the presentation were not actually achieved by the advisor directly.

According to a survey of 4000 investors conducted by the Paladin Registry, 91.4% of investors want their advisor to have a track record of their investment performance. Paladin Registry concluded that track records were not typically available from advisors. Most advisors have not found it necessary to have their own track record, since many investors still find it acceptable to just let the advisor choose investments for them.

These advisors are similar to professional buyers that shop on behalf of the investor to scout out investment opportunities. The investment managers for the major endowments (the ultimate professional buyers with just one client) are credited (or debited) with a track record. It is only a matter of time until individual investors, with 91.4% preference for real track records, begin to demand the same from their advisors.

Track Record: Reflection of Advisor’s Investment Judgment

It is perfectly understandable why investors want to see a record from an advisor that has management control (discretion) of their investment accounts. A track record is a reflection of the advisor’s investment judgment and decision making that is independent of an advisor’s presentation skills. If an investor is going to turn over control of the buy and sell decision to an advisor, then it would be prudent to see how that advisor has handled other decisions in the past.

Even if advisors are simply selecting mutual funds or choosing separate account managers on behalf of their investors, they should have a record of their past choices that would closely match how they intend to invest client funds. It’s not enough (and fairly misleading) to site the record of a mutual fund or separate manager unless that record coincided with the actual results achieved by the advisor’s clients in the past.

Investors should be careful when an advisor claims to pick only “the best” manager(s) or fund(s). They may say that they have a due diligence process for screening managers and it could look very impressive, but how can an investor know if that process truly worked without the advisor’s record to go with it.

Psychologically, the advisor is transferring the success of someone else’s track record and using that in their sales/consulting presentation. Under those circumstances, an investor should heed the maxim that “past performance is no indicator of future results”. As a side benefit of using an advisor with a track record, a client can be sure that the advisor/manager will be extra diligent in his management process since the client’s results will be included in the manager’s future performance record.

CFA’s Global Investment Performance Standards (GIPS)

Fortunately, there are global standards on how track records are to be calculated and presented. The CFA Institute’s Global Investment Performance Standards (GIPS) are the criteria that institutional investors require of their investment managers. These standards allow clients to evaluate track records from any firm in the world that adheres to them.

In much the same way that public corporations have to present accounting data in accordance with Generally Accepted Accounting Principals (GAAP) in the U.S., investment managers have to present their track records in compliance with GIPS. In this way, it is possible to make consistent comparisons across managers. Furthermore, the records of mutual funds, which are GIPS compliant and audited, can be compared directly to the records of separate account managers.

Calculating Performance Uniformly

Any advisor who has investment control (discretion to make buy and sell decisions) over accounts can adopt GIPS. The requirements are not difficult to implement and manage. The standards require managers to calculate performance in a uniform way and present their results into meaningful composite reports. There is broad leeway to include and exclude performance results from each composite, but the standards greatly diminish the potential for “gaming” track records by including only the best performing accounts or showing a potentially misleading “representative” account.

While managers can legally show records that are not GIPS compliant (with enough fine print to protect them from regulators), most institutional clients will not accept them. In addition, most institutional clients expect managers to not only have GIPS compliant records, but have their results audited by an independent third party as well.

Investors are looking for their advisors to be more responsible and accountable for the results of the advice and management they are providing. At the very least, individual investors should expect their advisors to provide them with separate account investment managers who have audited and GIPS compliant track records.

Not Asking For Too Much

Individual investors should be very leery of any advisor who shows a track record of a separate account manager or mutual fund and then implies that would have been his choice five years earlier. Finally, if the advisor has the responsibility to manage the client’s investment assets, asking the advisor for an audited written track record, is not asking for too much.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Choosing an advisor with experience is critical, but it’s not just a matter of years under their belt it is also a matter of results.  What is their track record? How have their portfolios preformed? The following article outlines questions to ask before determining who will manage your investments.

Sizing up a Financial Advisor

by Chris Parry
visit InvestorGuide.com to view the complete article

 A majority of investors are hesitant when looking into using a financial advisor. This is in part due to the fact that the financial service industry does not have the best track record. For example, many financial advisors work off commissions from certain

businesses which they receive for selling the products of that company. This creates an incentive for some financial advisors to sell certain products that will help them financially but may not be the right move for an investor. If you want to make the right decision with your money, using the expertise of a qualified, unbiased professional financial advisor may be the best way to create a financial plan which is ideal for you.

Getting referrals from acquaintances and friends for financial advisors is a good place to start but you should also look into each advisor on your own as you must ask as many questions as possible to make sure you are comfortable letting your financial advisor handle your investments. Below are some of the points which you should make sure of before choosing a financial advisor.

• The financial advisor should work for you on only a fee basis not on a commission based compensation structure. Advisors who work on commissions are generally more likely to recommend frequent transactions which may not be in your best interest. Also, an advisor who works on commissions may have ulterior motives because they make money both when you buy and when you sell securities.
• A financial advisor working for you must know the risks you are willing to take and stick to those terms. A good way to do this is to look at historical performance of the potential portfolio in bear markets to get a feel for how the value of that particular asset mix can fluctuate. An advisor who knows what risks you are willing and not willing to take will adjust your portfolio as need be to keep it focused on your financial goals.
• An advisor should work with you to set goals for your target rate of return. A fee only advisor can show you different models and different types of investments that have the potential for reaching the goals that you have set.
• Make sure the advisor writes a policy statement for you. A policy statement should have well laid out instructions that cover the following goals and risks: target return, tolerance of risk, time horizon, tax restraints, and also encompass any regulatory issues.
• The advisor should be active in rebalancing your portfolio. If there is a situation where an asset does not sit well with the originally specified target allocation, then they should either sell it or at least modify the exposure of your portfolio to it until the target, which you specified, is achieved.
• The advisor you choose should give you a quarterly report of your financial portfolio’s performance and its market value. They should determine if the market value of your portfolio is growing at a rate which will allow you to achieve your set financial goals. They should also be up front in telling you changes that they think you should make. 

How important is experience when it comes to selecting a financial advisor? According to Forbes, experience is the first thing to look.  The following article list experience as one of 10 things to evaluate when making a choice of advisor.

How To Select A Financial Advisor

Investors ought to be concerned with the quality of investment advice whenever an investment’s performance diverges from the investor’s perception of the riskiness of the investment. Performance that diverges from expectations is a signal that something might be wrong, and in the last year too many people got that signal. It was hard to ignore.

There is no simple formula, no single set of questions to ask or guidelines to follow when searching for a new advisor. One must, of course, know the different types of services offered by the different types of advisors–a subject covered in my last column. (See Know Your Broker Better.) But if you are thinking about changing brokers or advisors or whatever, or if you are wondering whether your current advisor is the right one, you can probably use some suggestions about how to find a competent investment advisor.

Here are 10 things to think about.

1. Experience–An advisor should have an appropriate amount of education and business experience. While a “finance” or business degree is not required, an advisor’s level of education is important. Experience is even more crucial. Advisors who have not experienced at two least two market cycles probably don’t have enough perspective.

2. Condescension–Beware of any advisor who belittles your concerns about risk, or who encourages you to buy investments you don’t fully understand. Fancy or complicated investments are rarely good ones.

3. Writing–An advisor should give you something in writing that describes the investments the advisor will recommend or make. Beware the advisor who tries to push a single product, or who says you have to decide right now lest you miss an opportunity.

4. Compensation–An advisor should tell you how he or she will be compensated, and how much the fees are for each transaction. Be suspicious of high-fee products, like variable annuities. And always remember that an investment account is like a bar of soap; every time you touch it, it gets smaller.

5. Wherewithal–An advisor should have sufficient financial wherewithal to make good a mistake or worse. An advisor should either be part of a large organization (like a bank, or a national or regional brokerage firm), or, if they are from a small firm, they should carry “errors and omissions” insurance. When dealing with local firms, small firms or solos, you must ask about insurance. If the advisor appears offended by the question, or says “no,” that advisor cannot to be relied on to invest your money.

6. Referrals–A referral from other professionals (e.g. a lawyer, or an accountant) can be a good place to start, especially when accompanied by statements like “I’ve sent other clients to this person, and they’ve been happy,” or “I’ve known this person professionally for 20 years.” Beware of referrals by professionals of their friends or relatives; these referrals are not objective.

7. Internet Search–Conduct due diligence. Run a Google search. Check the FINRA Web site (www.finra.org) under “Broker check.” Ask for examples of what the advisor has done in the past for clients, and ask how that worked out, especially in bad market conditions. Be curious. If anything makes you uncomfortable, go elsewhere.

8. Remain Vigilant–If you are not capable of or inclined to review periodic account statements, employ another professional to keep an eye on your advisor, even if you must pay for that service. It’s like getting a second opinion before surgery–you need to do this.

9. Track Record–Past performance is not an indicator of future profits, but it is definitely an indicator of risk. Avoid managers and advisors who claim to way out-perform the market or their peers. It probably means they are taking more risk.

10. Risk/Reward–Beware of advisors who tell you they can increase your income without increasing risk. What most investors don’t realize is that an increase of just 1% per year in the yield of a bond portfolio means taking on significantly more risk. The more an investor “needs” the income, the more important it is to make sure the investor’s principal is secure. “Chasing yields,” as it is known, can be a dangerous strategy.

Investors cannot afford to put blind trust in an advisor or a financial services company. When selecting an advisor, investors cannot be shy. They must know the questions to ask, and be able to spot the warning signs when something is amiss. It’s a tough task, and even smart people too often get it wrong. The only thing harder than finding a good advisor may be making investment decisions without one.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.