Q&A: Concerned about performance

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Question: I have two questions I am hoping you can address for me:

1. My current portfolio of approximately $500,000 is being managed by a financial planner through one of the large Canadian banks. We have taken a conservative strategy of 60% fixed income and 40% equities. For 2012 the performance was a 2% return before fees, taxes, inflation, etc. I feel this is not a good enough performance to be paying a financial advisor for and have pointed out the performance of the Defensive Portfolio in your Internet Wealth Builder newsletter. The response I got was a) it is easy to provide advice when you are not dealing with real people and real money, and b) there is no way we could invest $500,000 in only seven securities; that is not enough diversification. What would your advice be? Is he correct on his two points? Am I better off managing my own portfolio?

2. What sorts of things should good financial advisors provide in the way of report and reporting performance? – Darrell C.

Gordon Pape answers: For starters, a 2% performance in 2012 is not good, as you realize. You could have gotten about the same with less risk in a 5-year GIC. The DEX Universe Bond Index was up 3.6% on the year and the TSX Total Return Index was up 6.2%. So based on your weightings, your personal benchmark was 4.64%. Your portfolio returned less than half that.

If the advisor feels seven securities are not enough, you could always add others with similar risk/return metrics, in the equity/fixed income proportion you want.

When your money is being managed professionally, the most important thing to look for is value added. How much better are you doing than the benchmark on which the portfolio is modelled? If you are not beating it consistently, you might as well invest in ETFs and save yourself some money.

Perhaps last year was an aberration and your advisor had been doing a good job prior to then. But do some back checking. See how the portfolio performed in the three previous years against the appropriate benchmark. If it has been underachieving on a regular basis, you need to consider a change.

A good financial advisor should provide you with that information annually, based on a benchmark to which you both have agreed. Does yours?

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