What are the elements that lead individuals or families to choose and stay with their investment advisor? From research, and our own discussions with clients, we have concluded that you should ask five important questions of any advisor you consider:
1 – What is your investment philosophy and underlying approach to constructing portfolios for clients?
Ask if the manager tailors portfolio construction to each client’s needs and how that manager will adapt your portfolio to changes in your life, as you grow older or go through any number of life transitions. Then, ask the manager to walk you through the process the firm uses to make investment decisions. The process should be rigorous, disciplined, and consistent.
Aurora’s answer to Question 1:
2 – What research and investment tools do you use to inform your investment decisions?
Any investment advisory firm should be able to demonstrate that it subscribes to industry standard research and incorporates advisory tools. The better firms have developed or acquired specialist portfolio management tools to provide them with efficient and effective means to manage their clients’ accounts. Research should be centered on reputable sources. Finally, ask the manager how the firm uses technology and quantitative analysis to supplement its qualitative research.
Aurora’s answer to Question 2:
What informs our research? At the macro-economic level, we subscribe to a number of services that supply us with the economic data that we use to form our view of the future. We have online access to real-time databases that provide thousands of data points for each asset class or individual security. We also receive informed economic commentary that we use to shape and crosscheck our own conclusions. We subscribe to services that give us detailed daily and weekly information about funds flows among various asset classes such as bonds, equities and money markets, and between the various types of mutual funds and exchange traded funds. We also “dashboard” a number of market indicators and use the various observed combinations of these factors to inform our analysis of how the various sectors will behave with respect to one another.
The research that helps us make specific security selections comes from Wall Street sources, SEC filings by corporations, Bloomberg, Morningstar, Thomson Reuters, Zachs Investment Research, Columbine Capital, Ford Equity Research, Standard & Poor’s, Ativo Research, and Argus.
3 – What is the background and experience of your professional staff?
First, make sure that an advisor’s professional staff has both the appropriate education and professional development background and industry experience to make investment recommendations. A reputable firm should be able to produce proof of the academic qualifications and completed professional examinations of its professional staff.
Second, most advisors cannot provide total investment service “in house;” as a result, make sure your advisor has built strategic partnerships with specialist financial advisory firms to support its own efforts. An advisor should have the names of its custodians and specialist partners on its website or client materials.
Aurora’s answer to question 3:
4 – How will I know how my portfolio is performing?
Your advisor should agree to produce performance figures for your portfolio and should also be willing to compare that performance to a mutually agreed upon benchmark. That way, you can make an easy comparison.
Aurora’s answer to Question 4:
Clients receive independent reports from their custodian (either Fidelity or Schwab). These reports show monthly account gains and losses, and the transactions that have occurred in that month. Aurora provides clients with a quarterly portfolio performance statement. Aurora will also provide performance reports and analysis at their request, or in the normal course of conducting face-to-face client portfolio reviews, the frequencies of which depend on the size of the portfolio being managed.
An advisor’s fees should be transparent to you and easy to understand. Your best bet is to find a fee-only financial advisor. Ask your advisor if there are any hidden fees; for example, ask the manager if the firm benefits from placing your portfolio in a specific family of mutual funds where the advisory firm may earn what are called 12b1 fees, or whether the firm buys its clients shares in classes of mutual funds that have sales charges that the advisory firm shares. Remember, a fee-only financial advisor is what you want.
Aurora’s answer to Question 5:
Aurora is a fee-only advisor. The annual Asset Management Agreement fee for an unleveraged, long asset portfolio (containing accounts that do not involve investments in options, short positions, or structured products) is based on a percentage of the investable assets according to the following schedule:
- 1.15% on the first $1,000,000;
- 1.00% from $1,000,000 to $3,000,000;
- 0.80% from $3,000,000 to $5,000,000;
- 0.60% from $5,000,000 to $7,000,000, and
- Negotiable above $7,000,000.
The minimum annual fee is $5,000 and the minimum assets under management that Aurora will accept is $500,000 except where Aurora is satisfied that the client will bring the level of assets being managed directly by Aurora to such minimum within an agreed period of time. Current client relationships may exist where the fees are higher or lower than the fee schedule above.
Accounts that involve investment in options, short, leveraged or structured securities are only available to those clients who have more than $1,000,000 in investible financial assets, have demonstrated knowledge or are considered to understand the risks and objectives of trading strategies based on such instruments, and meet SEC qualifications, if any. Fees for such accounts are available, on application, to qualified clients.