We at Wealth Management Canada understand that finding a wealth manager can be difficult. Our team has created the list of tips below to help guide you through the process.
Tip #1: Strength and experience of management team
How experienced are the key players relative to other firms? Do they have diverse backgrounds or do they all come from the same area of the investment industry?It is crucial to have seasoned investment professionals overseeing your portfolio, but it is equally as critical to have a diverse group that can bring different perspectives when managing your capital.
Tip #2: Level of assets under management (AUM)
It is important to look at how significant your capital will be to the investment management firm, given there is often a direct correlation with the level of attention your portfolio may receive from a client servicing perspective. Moreover, although there are benefits of a firm with a large AUM due to scale, smaller boutique firms may have the ability to be more nimble in the marketplace while offering personalized services to best suit their clients` specific needs.
Tip #3: If the investment team has a meaningful portion of their own wealth invested in the strategy
It is imperative to find out if your advisor has a meaningful portion of his/her personal capital invested alongside his/her clients. If so, the level of focus the investments will receive can be significantly higher than if the advisor personally invests in a completely different way. In addition to creating a higher level of accountability, advisors that invest in the same portfolios as their clients display long-term confidence in the investment strategy.
Tip #4: Length of portfolio manager’s tenure at firm
If you are being sold on a fund’s track record, it is important to ask how long the current portfolio manager has been the lead on the fund, and if the track record represents the efforts of several different portfolio managers with potentially different investment styles over time. This will reveal a fund’s ability to consistently carry out strategies that have been successful in the past.
Tip #5: Length of performance track record
It is important to look at how long the fund has been in existence. It is difficult to examine the risk level and the future viability of a newly created fund because there is no historical data to examine its performance relative to long-term market trends. Assessing the long-term returns of a specific fund is a far more accurate indicator of its potential than the returns on a new fund that may be short-term in nature and not representative of long term strategies.
Tip #6: Level of risk in the strategy as measured by standard deviation (vs. a relevant benchmark)
How volatile has the strategy been relative to a relevant benchmark/index? For example, if a fund shows wide extreme peaks and troughs over the last few years while the relative benchmark has been consistently flat, it is a red flag!
How large have the maximum drawdowns been? Periodic market downfalls are a reality of the market; however, if there has been a substantial drawdown that is far greater than that of the relative benchmark, further investigation should be made.
Tip #7: If funds/strategies have been closed (and why)
Has the investment management firm often closed certain funds and shifted assets to a fund that was launched? What were the reasons for the closures? Oftentimes, firms close underperforming portfolios and subsequently open new portfolios with new strategies that help take advantage of changes in the market. While this may be a valid decision, it is important to ask if there were performance fee thresholds on the funds that were closed? If so, did those thresholds influence the decision to close the fund?
Tip #8: If there has been any recent change of control (through M&A activity, joint ventures, etc.)
Review any corporate actions that have changed the structure of the firm. Changes in control may indicate a shift to a different investment strategy and, more importantly, a change in the key managing directors of the investment firm. Substantial changes to the firm’s management team can alter the firm’s strategy, so a client must examine whether the individuals responsible for the firm’s past success are still in place to pursue its investment strategies.
Tip #9: Fee structure
Review base management fees, performance fees (if applicable), hurdles and deficiency carryforwards (if applicable), custodial fees, etc. These fee structures may work in conjunction with each other to maximize the net fees payable to the investment manager. As such, the overall cost of managing one’s investments may be higher than it initially seems. It is important to be familiar with the nature of the revenue stream of their wealth management company, as it can greatly impact overall portfolio returns.
Tip #10: Key employee retention plans
Although some level of turnover is to be expected in the investment management industry, you should look at what incentive programs the investment management firm has in place to retain their top talent. It is vital that firms have the right, performance-based incentive programs for their employees that ultimately motivate them to remain at the firm. A lower employee turnover will result in a greater consistency with not only portfolio management, but also in client services.
Tip #11: Look at all your Wealth Management options
It is vital that you research your options before committing your hard-earned capital.