The following details the main areas of structural and organisational weaknesses within wealth and asset management service providers that substantiate the need for independent structural assessment.

•  A lack of genuine investment expertise and discipline is often a key weakness. This should not be a problem with an appropriate business and service process and the systems that can deliver expertise from those who have it through those who do not. 

  • Many advisors (not all) are allowed to personally construct, plan and manage portfolios without any real expertise or knowledge of how to construct a portfolio; a portfolio is not an accumulation of products and securities sold over a period of time.  

• Resources allocated to research in terms of both time and money is also another key weakness for many advisors. 

  • It is not uncommon for some advisors to treat research as incidental to the job of managing money.  To do the job properly you need a dedicated research function within the organisation.  While this research function does not need to be anywhere near as large as that of a major institution, it needs to be large enough to be able to do in house economic, market and security research[3].   

• The level of quality control within an organisation. 

  • Many brokerages treat their financial advisors as independent businesses, allowing them free rein to recommend more or less what they want and blaming them when clients suffer the consequences of bad advice. 

•  While there are organisations that make sure that research and asset management decisions are dealt with centrally and, have fully funded asset management departments, the systems and business processes that deliver the security selection, asset allocation and portfolio management are weak and tend to have only one objective in mind, that of product distribution. 

•  A general lack of expertise, systems and knowledge on how to relate portfolio management to the management of financial needs over time.  Financial planning and asset management are still treated as separate issues even though it is impossible to properly construct a portfolio to meet financial needs over time without directly relating financial needs to the size and distribution of all their assets. 

Much of the weaknesses of an organisation are related to a misunderstanding of fiduciary responsibility, a responsibility which is discussed in TAMRIS’s Special Report on Suitability, Minimum Standards and Fiduciary Responsibility in the Canadian Financial Services Industry.

The above relate to major weaknesses in the portfolio construction, planning and management frameworks used by organisations.  Some of the secondary weaknesses are noted below.

·         Lack of accountability with regard to performance; any client that allows their advisor to provide either no performance analysis, or an extremely limited assessment of performance has no way of knowing how much they are being charged or whether or not there advisor is doing a proper job..

·         Lack of any formal reporting structures; many advisors are just no set up to provide formal written communication and most advisors have little training in written professional communication.   A lack of a formal communication structure also implies a transaction led as opposed to an advice led service process.

·         Wealth forecasting; many use simple wealth forecasting models when working out how much individuals can take from their investments over time.  The dangers of these simple tools are well documented in the TAMRIS website[4].  

The TAMRIS website provides more detailed information on what your advisors need to be doing to manage your money properly. 

 

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[1] It is therefore important that a consultant understands all the main approaches to asset and liability management, including their strengths and weaknesses.  Importantly understanding needs to be spatial and not linear.

[2] Simply understanding the basics is not investment expertise.  Most investment advisors are not actually investment experts, irrespective of marketing claims that state they are.  Most investment advisors are actually generalists that rely on the expertise of their organisation and who communicate the views and disciplines of their organisation. 

[3] There are far too many advisors who rely soely on basic third party research and software to deliver portfolio management services to their clients.  

[4] Please see the TAMRIS technical document on Asset Liability Modelling for further information.