How to Pick an Advisor who will get Great Returns!!

The Title might be click bait, but it’s important to understand that your Advisor has a lot less to do with your returns than you think. I’m about to prove it.

The only thing I don’t like about being a Financial Planner is getting blamed or rewarded for short-term returns. I have nothing to do with that and no one in the world knows how to pick the right thing and when. The earlier you can truly understand that, the better off you will be in the long run.

The most frustrating client relationship I have ever had was when I met with a couple and the husband decided he liked my financial planning, so he decided to move his accounts with me. Over the course of the next year, the markets were favourable and his wife decided to move her accounts to me, because, “I was getting good returns for her husband.”

I tried very hard to explain to her that “I” had nothing to do with that and it was just a good year for the market and his funds based on his risk tolerance. What was more important was that we focus on what we could control, which was the planning and they were in serious need of financial planning advice if they ever wanted to hit their retirement goals, which were likely unobtainable.

As can often be expected after a very good year, the following year, there was a bit of a correction and her accounts were barely positive on the return scale. At that point, she said that it was necessary for them to move their money to the guy her parents used, because “his” returns were better than “mine”. Maybe the funds he was using were performing better, but I can almost guarantee that the comparison she was using wasn’t apples to apples. I’m also frustrated about this in hindsight, because I know that the market has been really good since that day, so she is going to think it was a great move and the new guy is a better advisor than I am, because “his” returns have been good.

Some advisors might take credit for returns if the returns are good and promote those returns to their clients to make themselves look good, but you have to truly understand that we have nothing to do with good or bad returns, unless you’re working with someone who is taking strange risks with your money and picking specific funds they like and not building diverse portfolios based on your risk tolerance. Those guys are responsible for your returns - good or bad - and if you have a guy or girl who does that, I encourage you to compare their portfolio to a diverse portfolio fund to see if their risks are worth taking. There’s a pretty good chance they haven’t been. It’s all about timing and luck in the short term and nothing else. Thinking your advisor is better than the next guy due to comparing short-term returns is often like thinking the weatherman in the summer is better than the weatherman in the winter, because the temperature is better. The market moves in the same direction for every advisor and we don’t control the market or know what it’s going to do. Just because the market is good, doesn’t mean that we are good at our job and just because the market is bad doesn’t mean we are bad at our job.

Over the long-term, you are going to make money with basically any advisor as long as they aren’t gambling with your money, so focus on the planning and not the short-term returns.

Here is my little piece of proof.

Two brothers

Everyone has heard of RBC and TD.

So, let’s say that two brothers each got a $100,000 inheritance from their parents and wanted to invest the money.

One brother decided to go to RBC and the other brother decided to go to TD and they are both fairly young and comfortable with risk, so they are Growth investors.

Brother A met with his advisor at RBC on January 20, 2018 and invested $100,000 and today (September 21, 2018) his account is worth $100,060. (RBC Select Growth Portfolio)

Brother B met with his advisor at TD on February 10, 2018. He was busier and couldn’t get in earlier. He invested $100,000 and today his account is worth $106,060. (TD Comfort Growth Portfolio)

Now Brother A thinks his advisor and RBC “sucks ass”, because he’s got $6,000 less than his brother who is at TD, but is that fair to judge the institution or the advisor?

Let me be very clear in stating that everyone’s funds move in a similar fashion, because they move with the market and not with how good or bad your advisor is.

So, now let’s look and see what would have happened if both of the brothers invested with the different institutions on the same day:

RBC vs. TD:

January 20

RBC: $100,600 (I guess this RBC guy is better now)
TD: $99,670

February 10

RBC: $105,700
TD: $106,060 (I guess this TD guy is better now)

Look how much of a difference 3-weeks can make. Now do you understand that it’s not the Advisor, especially in the short-term? I can assure you that not one of us is happy to see our clients getting poor returns, or watching their accounts drop in value. It’s stressful as hell and I wish there was a way to know how to avoid that, but their isn’t.

It’s time to start choosing your advisor based on the advice they are giving you and not on how your funds, or your friends funds are performing. In the end, you’ll make money if you stay the course and you’ll make more money if you don’t spend a fortune on management fees. And although it’s a hard number to quantify, every study that’s been done shows that advisors do bring a real level of value to the relationship, so if you can find a good one you trust, then it’s not a bad idea to let them guide you where you want to go.

Kent TilleyComment