Saturday, June 24, 2017

Investment Advisor Guarantees Don't Protect Against Losses

I'm not an investment advisor, although I have been asked to analyze an investment or a proposed one now and then. I have been watching the Travelers Golf Tournament this weekend and noticed the numerous commercials being aired and directed at investment advisors that are providing for guarantees. A certain investment firm has been offering to refund investment advisory fees when investors are unhappy, while another has been offering to rebate the fees after two quarters of negative performance. Some investors I know have expressed concerns and questioned me over these offers.

The problem: Many investors mistakenly believe that they will get better advice because of these offers and will be protected from investment losses. The guarantees are not a good reason to select a particular brokerage nor, by any means, a useful way to judge the value of the assistance you may get over one quarter of performance activity. .

How some of these offers work: one allows customers who use any of five advisory services to request a refund of fees for the previous quarter for any reason. The services include the firm's Managed Portfolios, whose model of mutual funds and exchange-traded funds (ETFs) are selected with the help of an adviser.  The minimum investment is $25,000. Another is private-client package, which provides an adviser who creates a tailored portfolio.  That minimum investment is a cool $500,000. Annual fees are 0.9% of your managed assets or lower.  I'm also not sure based upon a footnote you'll find with its website, whether or not either of these offers applies to anyone other than a "current client".

Another firm's service fees rebate only applies to a particular service, which provides for an adviser and assists in selecting among several model portfolios. If your holdings experience two consecutive quarters of negative returns, the firm will automatically refund the fees from both quarters (but not the losses that most certainly go along with the negative earnings). This package requires a $25,000 minimum investment and charges an annual fee of up to 1.25% of managed assets. This guarantee does not reimburse your for investment losses, even if your not satisfied.  You will simply get your fees back. 
It has been said that both firms (and all firms, for that matter) worry about losing clients to much-lower-cost services known as robo-advisers who are offered by firms ranging from online newcomers to giants such as Vanguard and Fidelity. These robo-­advisers generally charge 0.35% or less to generate model portfolios of exchanged traded funds even though most of these so-called investment advisors won’t put you in touch with a human adviser.

So offering a "money-back" guarantee (for fees) is not helpful in choosing an investment, nor an advisor and doesn't protect your funds against losses.

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