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Finding the Right Advisor or Trustee

It's all about low costs, a sensible strategy, and sound ethics.

Samuel Lee, 08/26/2014

This article was published in the August 2014 issue of Morningstar ETFInvestor.Download a complimentary copy of ETFInvestor here.

One of the big tasks faced by older investors is setting up a portfolio for the benefit of another person, who may not be knowledgeable about investing. Usually these investors are knowledgeable about investing, have had successful careers, and have managed their own portfolios for most of their lives, but are looking to simplify their affairs for their spouses and children. However, success in business and in investing has created an unusual blind spot: whom to entrust assets to and how a safe, robust portfolio should look that can withstand the vicissitudes of the markets over decades without much intervention.

When someone who doesn't know much about money is thrust into the task of managing a lot of it, the outcome is disaster. Finding someone you can trust who also offers good value for his services can be hard. In my experience, good advisors are humble about the value they can provide and are aware that charging more than 1% on a retiree's portfolio is a huge drag on his income stream and is likely to dramatically shorten the expected longevity of the portfolio.

A good default option against which all prospective advisors should be compared is a not-for-profit firm like Vanguard or TIAA-CREF. An advisor from one of these firms will not offer outstanding insights, make prescient moves, or select star managers. In fact, much of their advice will be cookie-cutter. And that's okay, even desirable. When dealing with financial "helpers," the overriding goal should be to find someone who won't steal from you, charge you too much, or stoke your emotions, while offering competent financial planning. Asking for much more is like going to your local park in the hopes of recruiting NBA-level talent to your intramural team.

When assessing advisors, look for the following:

1) Low all-in costs. The standard by which all potential advisors should be judged in this respect is Vanguard.

Vanguard Personal Advisor Services charges only a flat 0.30% of assets under management and requires a modest $100,000 minimum for a dedicated advisor with a Certified Financial Planner designation. Don't expect fancy tax- or estate-planning, but competent, boilerplate advice from a trustworthy source. Vanguard also has a slightly more expensive service for those who have more demanding needs.

Vanguard also offers dirt-cheap trust services. Investment-management services cost 0.70% for the first million, 0.35% for the next million, and 0.20% for everything after that. They charge a flat $2,500 annual fee per trust registration per trustee. Not only is this an outstanding deal, you greatly reduce the chances your trust falls into the hands of corrupt or incompetent trustees. This peace of mind is hard to beat.

I'm reminded of the story of Wellington R. Burt, an eccentric magnate who willed that his estate be held in trust until 21 years after the death of his last surviving grandchild alive at his time of death. When he died in 1919, his estate was estimated to be worth between $40 million and $90 million. When the estate was settled in 2010, it had grown to about $100 million. That's a 0% to 1% nominal growth rate over 91 years, a record worse than simply owning cash. A 5% nominal growth rate would have turned $40 million into $3.4 billion over the same period.

2) Transparency. A surprising number of people who use a financial advisor have little idea how much they're paying all-in. This is not a failing on their part. Bad financial advisors gloss over how much their services cost. A good financial advisor will make crystal clear his fee schedule and sources of income from day one.

The ideal fee schedule is simple and transparent and paid directly by you and only you rather than through commissions, trailers, and other opaque sources.

3) Humility. The business of financial advice and the business of investment excellence require largely nonoverlapping skill sets. One's success as a financial advisor is in large part determined by interpersonal skills. One's success as an investor is largely determined by being able to maintain a rational perspective regardless of what other people are doing, as well as a strong understanding of risk, business, and human nature. Realistically, most financial advisors will not beat the market and cannot offer the reasoned expectation that they can, net of all fees and taxes. Therefore, you should not look for managers who promise to beat the market or who justify high fees by offering access to their expertise. One of the surest signs of a huckster is someone pretending to offer "exclusive" investments the hoi polloi can't touch: nontraded REITs, private placements, structured notes, and the like.

Look for advisors who favor low-cost, simple, transparent investments.

4) An intrinsic-value orientation. Investing is about laying out money today for more in the future. Anyone who touches your money should understand this. While some investors have made a lot of money using technical analysis, market-price-based strategies should be only a sleeve of one's overall portfolio at most, if at all. The intrinsic-value mindset is uniquely robust to the uncertainty involved in forecasting the future. This doesn't mean an intrinsic-value investor is guaranteed to do well, but focusing on such investors reduces your odds of entrusting your money to the financial equivalent of a witch doctor.

5) Evidence of sound ethics. This means a clean disciplinary record on FINRA BrokerCheck at a bare minimum. Ideally, you want to do a full background check on your financial advisor as a precautionary measure to verify things like education, work history, credentials, and lack of criminal record. An advisor should also offer to adhere to a fiduciary standard of care. I would look askance at an advisor who doesn't have a fiduciary relationship with all his clients. Being ethical isn't something you can or should switch on and off, but a fixture of one's character. That means treating all of one's clients with the same high standard of care.

Note that this list omits a lot of things many investors care about. The following are nice to have but are not critical:

1) Someone you can talk to in person. While this is a personal preference, it's one that will greatly reduce your pool of options without necessarily improving your outcome.

2) Someone of your own ethnicity or religion. It's not a coincidence that Bernie Madoff was the biggest and most successful fraudster in history. He was an active participant and supporter of the Jewish community; his reputation was unimpeachable. People did not ask questions or probe him too deeply because of it. Don't relax your standards just because someone has a good reputation within the community, and don't give them the benefit of the doubt if you see warning flags like high fees and opaque, complicated investments.

3) Someone recommended by your friends or colleagues. Most people are not equipped to judge the merits of their financial advisors. Even professionals like accountants and lawyers are not necessarily the best judges of financial advisors.

A Checklist

  • After your first meeting with the advisor, do you know how much you'd be paying and how the advisor is compensated?
  • Is the advisor modest about what he can achieve?
  • Does the advisor mainly use simple, transparent, low-cost investments like index funds and no-load, low-turnover mutual funds?
  • Are the all-in costs of an advisor's services plus the funds he selects low?
  • Does the advisor follow a fiduciary standard of care, meaning he's legally obliged to put your interests first?
  • Does the advisor have a clean disciplinary record with FINRA?
  • Does the advisor have a clean credit history?
  • Are the advisor's self-professed biography and credentials consistent with what can be verified through third-party sources such as background checks and credential organizations?


Disclosure: Morningstar, Inc.'s Investment Management division licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index. 


Samuel Lee is an ETF Analyst with Morningstar.

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