By Amanda Morrall
Much has changed in the financial advisory sector over the past few years. New Zealand went from being the equivalent of the Wild West to the former East Germany with respect to the rules and regulations.
For my Take Five today, interest.co.nz's senior analyst Craig Simpson (who is also accredited as an authorised financial advisor) and I discuss how to judge performance of your portfolio as well as some key considerations around using a financial advisor.
We welcome your comments or question by email at amanda.morrall@interest.co.nz or in the comment thread below.
1) Performance
AM) How can you judge if your fund is performing well?
CS) It's very subjective because it depends on your goals and your objectives. As a general rule of thumb, if, for example you are in NZ equities (that's New Zealand companies) you would be looking at the NZX50 as a benchmark. You have to benchmark it against something that is appropriate for your situation. If your goal is to beat cash by 5%, then that's going to be your benchmark. Ultimately it comes down to what you are trying to achieve from your portfolio.
AM) What's a good benchmark in KiwiSaver?
CS) I think the median of all the managers in a particular sector. Some will be in the 50 per cent above, some will be in the 50 per cent below the median. Our data will give you a ranking. Something that ranks in the top dozen consistently. See our performance ranking list here. See also Morningstar New Zealand regular KiwiSaver performance reports here.
2) Fees
AM) A lot of countries have moved away from commission based remuneration systems to fee for advice service only. New Zealand has not yet gone this route. What's the standard remuneration formula investor here can expect?
CS) There are a few advisors that have moved to fee for service and it's gaining momentum. But mostly the typical advisor will charge you 1% of your total funds under management. Others might charge a reduced amount around 0.5% on top of a regular fee. I've seen some advisors charging monthly for some of these services so $400-$500 a month.
AM) Are you having to pay another layer of fees for the investment management costs associated with your fund?
CS) Yes, but in some cases they are tax deductible. What you should do is add up all the fees together. The average custodial fees in NZ will be somewhere around 1%, plus fund managers at another 1.5% so 2.5%.
AM) Advisors are now obliged to explain all this up front correct?
CS) Absolutely. They have to disclose their fees if they are an authorised financial advisor.
3) Communications
AM) How much contact can you expect from a financial advisor?
CS) A lot of advisors will group their clients into A,B, C or silver, gold or platinum or what have you, clients with over NZ$1 million might get quarterly meetings; $500,000 semi-annually and for $100,000-$200,000, it might be annually. I take a slightly different view, I think regardless of how much money you have to invest, your money is important. So the frequency of communication should be a matter of discussion between you and your advisor. I would have thought at a minimum quarterly especially if we are in volatile times. A lot of advisors only talk to their clients in good times but it should be bad times as well.
AM) What about in the event of a stock market crash? Should they get on the phone with you?
CS) Yes. If not by phone then through some form of written communication. In the past I found it helpful to send out regular communications with my clients. That way they know you are engaged with them, they are getting regular updates and they feel informed.
4) Expertise
AM) How do you know how well informed your advisor is?
CS) The key for me, and this is my opinion, is around the type of communication you get. How well does an advisor explain complex or situational examples like with the recent volatility - what was happening to you. Does it make sense, are they explaining it in a logical fashion. You have to have a rationale and logical conclusion.
5) Responsibility
AM) Whose responsibility is it to ensure information is understood?
CS) I've always looked at it as the advisor's responsibility but clients need to take some accountability because it's their money. If you are not sure, or not understanding something ask. The advisor might have to rephrase it differently. The majority of responsibility should lie with the advisor to ensure the client understands and that the products they are getting into are suitable for them and their circumstances.
For more on how to find a financial advisor see the Institute of Financial Advisors website
here and also the Financial Markets Authority website
here.
To read other Take Fives by Amanda Morrall click here. You can also follow Amanda on Twitter @amandamorrall
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