I’ll get to the punchline and then explain the reasoning: The KYA Process (Know Your Advisor tool to help investors pick an advisor) is going to become a small e-book (I’m thinking about 20 pages in total at this point, but don’t hold me to that). It will, of course, be free but I feel that there are so many details and variables involved for all the different types of investors out there that there can’t possibly be one set of questions that will work for everyone. New investors won’t have enough money to deal with a fee-based or fee-only advisor. Large investors may want more from their investment advisor and/or use separate advisors for investing and financial planning. DSC is a very viable option for some newer investors if disclosed to them properly… and so on, and so on.

Example of Some More Constructive Feedback

Tom Bradley, head honcho at Steadyhand Funds, sent me the following email:

Preet,

You are to be congratulated for taking on the KYA project.  Picking a licensed professional to work with is one of the most important aspects of investing – arguably the most important thing for investors who are totally reliant on their advisor.

I know a lot of thought has gone in to the KYA questionnaire.  We have a few additional thoughts you might consider.

First, a general comment.  This questionnaire is for someone who is looking for soup-to-nuts financial planning and advice.  This is in contrast to someone who is strictly looking for ‘investment advice’.  It’s an important distinction because the point system embedded in the questionnaire rewards the breadth of offering and expertise more than it does the depth.  That makes sense in the context of a client who needs the full service, but may lead to an inappropriate result for a client looking for investment advice only.  In other words, an advisor focused on investments, and the product and market knowledge related to that, is likely to have more to offer that type of client.

In addition, there are a couple of areas where you might consider adding to the questionnaire.

Philosophy

When it comes to investing, there are thousands of ways to skin a cat and each advisor has a different approach.  It’s important, first of all, to determine whether the advisor has a well-grounded, consistent philosophy.  While this sounds obvious, it’s often the case that an advisor doesn’t, and is subject to the changing trends, and dare I say fads, in the industry.  Without a stable foundation, it’s unlikely the advisor will keep the client on a steady, long-term path.

With regard to investment philosophy, it’s important that the client understand how the advisor is going to do it.  Are they a value investor?  Or is it growth?  Do they use funds and/or ETFs?  How did they work with their clients in the fall of 2008?

The advisor’s approach to asset mix is important to understand.  Are they active in shifting their clients’ asset mix?  How big are the shifts?  Do they get their clients right out of the market at certain times?

Reporting

A key part of an advisor’s service is the on-going reporting – regular statements and quarterly updates.  In hiring an advisor, it’s essential that the reporting package be part of the assessment.  Will the client know (1) what they own (i.e. overall mix by asset class and geography); (2) what they are paying (including commissions, MERs and administrative fees); and (3) what their returns are?

We recognize that advisors don’t have control over the reporting protocol of their firms, but it’s nonetheless a required piece of the service offering.  Not knowing any or all of those three things doesn’t allow the client to monitor the advisor’s work.  Why would a client hire an advisor that isn’t going to give them the tools to assess their performance?  To us, inadequate reporting is a deal breaker and should be given a heavy weighing in the questionnaire.

Preet, given that this was a long piece, I’ve emailed it to you.   You’re free to use it or post it as you wish.

All the best,

TB

Tom Bradley  |   President

Steadyhand Investment Funds Inc.

Great feedback Tom, and thanks.

Here was my response, and I’ve decided to share it with everyone:

Hi Tom, thanks for your comments.

I’ve received a tremendous amount of feedback – about 95% constructive – from the industry who are eager to build upon this initial start. I’m digesting it all, and taking everyone’s comments to heart. Just to give you an idea as to a couple of the common themes:

1. Distinction between investment advice and financial planning – just as you mention, there are advisors who focus more on one area as opposed to the other, or provide more breadth as opposed to depth. This is something that needs to be addressed.

2. Advisors (investment focused) definitely want more detailed questions on this side of the questionnaire. Including philosophy questions, etc.

3. Planners want more emphasis on planning, and qualitative aspects of the advisor-client relationship.

This can’t be done in the current format of the KYA.

As you know, the size of the portfolio dictates where an investor can go. Discussing investments in more detail is of limited utility for someone shopping around a $10,000 portfolio – you’re basically going to get some fund of fund program and that’s about it. It makes much more sense as the portfolio in question grows because there are more viable options.

To that end, I think the next step is to start by defining the matrix of client-advisor relationships. You have DIY -> Full Service (on both the investment side and planning side), and you have Passive -> Active as another dimension. You also have portfolio size as a fourth dimension.

I’ll flesh that out next, which I’ve tipped my readers to today on the blog (yesterday’s blog post: “Active or Passive, Advisor or No Advisor?“, which will give us maybe 4-6 different general client profiles (for example, if someone has $10,000 you’re going to be limited to an advisor who covers both investments and planning, if you have $1 MM you can start looking at hiring ‘specialists’ in both, etc.)

Once that is delineated, then it would warrant a different KYA questionnaire for each group.

…and I thought I’d be done this weekend with this endeavour! Ha!

I’m very pleased with all the positive feedback and outreaches from people who want to help with this. Progress will be posted on the blog for all to see, and I will probably post your comment and this response since it will be notable to others following on the process.

I’m thinking this will take a few months to complete, but hopefully the extra time translates into more widespread utility.

So there you have it. It’s becoming a monster. But I think it’s going to be better than I was hoping it would be – we shall see…

Preet