By Hopeton Morrison, Contributor
A good financial adviser must have a thorough understanding of risk management.
THERE ARE many persons in the local and international securities industry that go by one or more of the designations, personal financial advisor, financial analyst, investment dealer and so on.
But what really are those qualities that define that very small band of persons who become exceptional and extraordinary wealth advisers? Don't be fooled by all the hype surrounding the list of licensed dealers that is published each week in the local financial press. As in everything else there is good, better, best and bad for that matter.
The Financial Services Commission (FSC) publishes a list of licensed dealers on its web-site and in its last dated listing at May 27, 2004 there were 69 such dealers. Of these, 55 were attached to some companies and 14 were individual dealers. The FSC also licenses investment advisers but when contacted that institution said that at the moment there were none licensed by them.
ATTACHMENTS
As far as it could be determined most of these wealth advisers are attached to a major bank, investment house, or brokerage. Individual dealers tend to operate independently. The question therefore is what should an investor expect from a good wealth adviser? Here are "Ten Hot Tips" that the FSC says that every investor should know.
If you are an investor ensure that:
The dealer/investment adviser is licensed by the FSC.
You should take a look at the latest audited financial statement of the firm you are investing in. If necessary seek out an independent expert (e.g. financial analyst, accountant) to explain the financial accounts.
Ensure that you are comfortable with any document that you are asked to sign. If you are unsure get a second opinion.
Make sure you understand the level of risk that you are taking.
You must know what the dealer/investment adviser is getting out of any transaction made.
Don't put all your eggs in one basket. Diversify your investment and the firms you use.
Remember, the higher the return the greater the risk.
You must know the investment you are buying and seek advice if you don't.
You should monitor your investment. Get regular statements and make a new appraisal of the firm/individual and the investment instrument.
Don't hesitate to complain to the Financial Services Commission if you are not satisfied with the quality of service that you receive.
Hot Tip # 5 above is particularly worth paying attention to. This tip from the FSC is very crucial as fees and charges invariably take a massive bite out of your investments. There are some fees that cannot be avoided such as those charged by the regulators and of course the Government's GCT. But be very cautious about the degree of loading (or one time fee either when you buy or about to sell a security), annual management fees and brokers' commissions that you are charged.
MANAGEMENT FEES
Within the international capital markets it is felt by many authoritative sources that a 1 to 1.5 per cent management fee is just about tolerable. At the same time some might argue with some justification too, that such a fee structure is just not appropriate for Jamaica where benchmark interest rates are so high as against these financial markets in the developed world where again rates are in the low single digit bracket. But to get another perspective, a broader international one, on what drives the most successful wealth advisers it is worth looking at the Robb Report Worth which identified its 100 most exclusive wealth advisers in its October 2004 edition. The following indicators are very instructive:
Investing these days is marked by uncertainty as in the outcome of the Iraqi war. A good financial adviser must have a thorough understanding of risk management. In fact risk is more than a function of what is happening in Iraq. Within the last two years we have also seen the bottom falling out of Internet and technology stocks which has just served to further frazzle the nerves of already anxious investors. So the focus for the international investor today is no longer wealth expansion but more wealth protection.
All of a sudden preservation has become the new growth. The Robb Report Worth spoke to defensive portfolio construction as a particular approach that clients see as the most important of all competencies right now. The top advisers ensure that they take into account their clients' risk quotient and build their portfolios around this. Trying to understand a client's fears and risk tolerance used to be uncommon until now.
ALTERNATIVE
INVESTMENT INSTRUMENTS
Outside of risk management it is also clear that the top advisers are able to show clients a range of alternative investment instruments including hedge funds. In fact wealth management these days has broadened from one that is a "transaction-based process to one that is more relationship-based and holistic-" (Robb Report Worth) Some top advisors are now utilising a team-based approach as they face a smarter and more demanding client base. Typical teams of advisers now include financial analysts, insurance experts, attorneys and accountants which may be in-house or contracted from outside. That has resulted in a broader band of specialist competencies which itself offers another hedge against risk. It is therefore important to diversify the advisory process in addition to the portfolio. The net effect is that the financial adviser becomes the 'captain' of the team rather than continuing to be the repository of all wealth management knowledge.
INVESTMENT PROFESSIONALS
Today some of the bigger international wealth management firms such as JP Morgan and Goldman Sachs routinely engage a team of three to four investment professionals with their clients. Robb Report Worth addresses this new phenomenon thus: "There is no way one person can be on top of stocks, bonds, commodities, currencies and money managers, and still be thoughtful about asset allocation and risk management."
It appears that the leading measure of competence expected from superior wealth managers is professional designation and is something that our local sector should note.
Increasingly more professionals in the local securities industry are being certified as Chartered Financial Analysts (CFA). But that is not the designation of first choice among the top security advisers internationally. In fact the Certified Public Accountant (CPA) designation which is rapidly gaining in popularity here in Jamaica features more prominently among them. Interestingly, for straight professional superiority the designation of choice among the best is the Certified Financial Planner (CFP). Other highly rated designations are the Personal Financial Specialist (PFS) and the Certified Investment Management Analyst (CIMA).
It is important then that you the investor ask your local personal financial planner about his or her professional training as there appears to be a strong correlation between professional training and superior wealth advisory services. Stated another way, an MBA by itself just does not cut it in the global marketplace. A second measure of top competence is professional experience.
Another weakness of our local securities industry is that not enough of the investment dealers and advisers have built up a track record over time. There is a load of bright, aggressive, young, investment dealers but Robb Report Worth speaks to most of the top 100 advisers in their survey working in the industry for at least a decade with some putting in as much as 25 years. They are able to ensure that clients find concurrence with their investments, personal financial goals and lifestyle.
Hopeton Morrison is general manager of St. Thomas
Co-operative Credit Union Ltd. and lecturer in the School of Business Administration at the University of Technology. Please send comments and questions
to: hmorrison@stccu.com.
