Nothing punctures client complacency about investment advisers like a bad year for the markets. So let the intensive portfolio reviews begin. The year 2015 was a notably bad one for investors, and advisers should absolutely be held accountable for the way in which they met the challenge. Be scientific about assessing your adviser, not emotional. Using our Globe and Mail adviser evaluation worksheet, you'll get the context to properly judge your portfolio, and assess the broader relationship with your adviser.
'I am happy with how my portfolio has performed in 2015'
You lost money in the past year? That's the kind of year it was. Pros who manage some of the country's largest Canadian balanced mutual funds were well under water as of mid-December. That tells you it's unexceptional for your portfolio to be in the red.
The amount you lost is the key. To judge the severity, compare your portfolio components to the appropriate benchmark stock and bond indexes, minus fees. Use the FTSE TMX Canada Universe Bond Index for your bond holdings, the S&P/TSX composite total return index for your Canadian stocks, the S&P 500 total return index for your U.S. stocks and the MSCI EAFE total return index for your international (outside North America) holdings. Total return indexes include dividends as well as share price gains or losses.
The firm PWL Capital posts major stock and bond index returns on its website (https://www.pwlcapital.com/en/The-Firm/Market-Statistics). Results for December and calendar 2015 should be available after the turn of the year. If you own U.S. or international funds with currency hedging, compare them to the regular version of the S&P 500 and EAFE indexes. Unhedged funds should be compared to these index returns expressed in Canadian dollars.
'I have some duds in my portfolio, but the damage was contained'
Canadian stocks were awful – did you have exposure to the U.S. and international markets, which did a fair bit better? Preferred shares were a disaster – did your adviser mix them judiciously into your portfolio so that they didn't crowd out bonds? Junk bonds got hammered – did your adviser limit them to a small portion of your holdings, maybe 5 per cent or thereabouts? Energy was a portfolio killer – did your adviser limit your exposure?
'My portfolio accurately reflects my tolerance for risk, even after 2015'
Clients typically over-estimate their ability to tolerate losses like we saw in 2015. Partly, this is because the risk assessment tools used in the investment industry are lame and cause people to under-estimate their ability to live with risk. Good advisers understand this and build portfolios accordingly. If you feel overwhelmed by your losses in 2015, it's a sign that your adviser wasn't in sync with your risk tolerance.
'My long-term results have been good'
Frankly, one year's results are generally insufficient to decide the value of an adviser's work on your portfolio. Three or, better, five years is preferable. Use the same benchmarking process as in Step One to assess those longer term results.
The short term matters only if your returns are notably bad. This suggests your portfolio was not well constructed and left you vulnerable to the kind of market setback good advisers always have in the back of their minds.
'I have a financial plan and bad years like 2015 were factored in'
One of the signs you have a good adviser is that your investment approach is dictated by a financial plan. The plan's purpose is to map a route to achieving financial goals like a comfortable retirement and putting your kids through university.
As part of the planning process, your adviser will have looked at how much you have saved and how much you contribute to your investments on an ongoing basis. The adviser should then have calculated the average annual rate of return you'll need to meet your goals. A realistic target in the 5 per cent range after fees suggests a loss in 2015 will easily be offset by gains in the future.
'I am confident of reaching my goals'
Your answer to this question relates to the extent that your adviser has referred back to your financial plan over the years to document your progress. You want to hear something along the lines of 'yes, we're right on track," or 'we're not on track and here's what we're going to do to fix that.'
'My adviser has already contacted me to discuss how I'm affected by weak markets'
You should talk to your adviser in depth once a year to discuss your finances, be it in person, by phone or on Skype. Beyond that, it's typical for advisers to send out update e-mails, particularly in stressful times for the markets. In some way, your adviser should have contacted you to provide reassurance and answer any questions you might have about the market dramas of 2015.
'My adviser is keeping an eye on my debt levels as well as my investments'
Here's a great test of whether you're dealing with a true adviser or just an investment sales person. The true adviser understands that building net worth must be accomplished in two ways –by saving and investing, and lowering debt.
'I feel fine paying my adviser after a losing year because I got solid advice'
People sometimes ask me why they have to pay fees when their investments lose money. The answer is that the client-adviser relationship is supposed to be based on wide-ranging advice, with investments being just a part of that.
Click here for the Globe and Mail adviser evaluation worksheet