This website does not relate to situations where individuals are managing their own portfolios and relying on product and transaction recommendations from their brokers. There is little or no responsibility here on behalf of the broker to make sure the product is appropriate within a portfolio construct.
Is your advisor taking the weight or shifting the responsibility?
If you are depending on your advisor to make a product/transaction recommendation within a portfolio designed by the advisor to meet your financial needs over time, irrespective of whether it is an advisory (before the fact) or discretionary (after the fact) relationship, your advisor needs to justify every product recommendation as well as every asset allocation and all changes to security selection, asset allocation and strategy.
Indeed, while the individual may not fully understand the following questions, there is nothing to stop them from asking their advisor.
Does the product complement the roles of all other assets without having to force the sale or purchase of another investment?
Does the addition of the asset positively affect the ability of the portfolio to meet financial needs at any point in time and at all points in time?
Is the advisor able to model the interaction of the new asset within the portfolio and its ability to meet financial needs over time?
Does it provide better management of liquidity?
Is it cheaper and, is it a more efficient method of allocating to an asset class?
For example, why buy an actively managed mutual fund that mirrors the index when you can buy an indexed investment at a lower cost, or a bond fund when all you need is a place to park your cash for a year?
Does it provide the opportunity for better performance, better management of risk or lower costs?
If it is a complex product, why is better than a combination of cheaper basic elements; cash, fixed interest and equities?
How much does the advisor earn from the recommendation and how much will they continue to be paid if the product does not require any management?
Your advisor needs to show you the effects of the additional charges on your return, how much return the product would provide under different conditions relative to other options available in the market place or, within your portfolio if investments are being sold to finance the purchase.
It is a fact that many advisors solve problems with products when a simpler cheaper and more appropriate solution is available. While one can understand that is how many advisors are remunerated, the logic of many a recommendation has little or no foundation.
The detailed mechanics, the pros and the cons, of the product need to be provided in summary form and in plain English.
While a prospectus is also necessary, the investor should not have to rely on it to find the salient details. Indeed, if your advisor relies solely on the prospectuses for the risk disclosure it is highly likely that the product is unnecessary and it is possible that your advisor does not fully understand the product.
Because the prospectus cannot possibly relate to your financial needs, risk preferences or the current risks in the market place. It was not designed with this purpose in mind
TAMRIS draws no distinction between an advisory relationship and a discretionary relationship when it comes to accountability and the need for an advisor to justify their transactions, their strategy or their performance.
While an advisory relationship requires a justification prior to the client’s acceptance, a discretionary relationship requires justification after the fact, at the client’s review. A discretionary relationship should not replace or obviate the need for accountability. Organisations structured to deliver a wealth management solutions should not find this a problem because they will be organised to provide this information.