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Why Harbor Advisory: Selecting an Investment Advisor

Weld Butler
Weld R. Butler

A Note from Weld Butler - Principal & Senior Counselor Harbor Advisory

Thinking about hiring an investment advisor? For many people hiring an investment advisor is a new experience. The selection process, the criteria important to it and the appropriate questions require serious thought.

In an effort to assist people in their search for sound, well-balanced investment advice, my father and Harbor Advisory's founder, Robert Butler, wrote the following guide. Today, I believe this is as practical and useful as it was when written nearly three decades ago. The only changes that have been made are to reflect the effects of inflation where nominal amounts are involved.

Robert Butler
Robert G. Butler

A Letter from Robert G. Butler - President Harbor Advisory Corporation, July 1981

To Our Prospective Clients,
A decade ago I decided to leave the world of large financial corporations. I was convinced that many investors, particularly those with moderate wealth, could effectively be advised by a smaller organization. I had spent thirteen years with Merrill Lynch, first as an account executive, then managing a department that worked with trust lawyers, bankers, investment counselors and mutual funds.

I began my business plan by listing those characteristics I would look for if I were seeking an investment advisor. Then I considered the ways I would judge the advisor's effectiveness. Perhaps they will be useful to you.

 

A Guide to Selecting an Investment Advisor

1. Experience - I would insist that the advisor had a credible academic and financially oriented background. I would also want the advisor to have been through the rigors of several market cycles.

2. Philosophy - I would insist on a counselor who operates with a well-developed investment philosophy which he or she could clearly explain, and could be relied upon to maintain. I would avoid those who seem inclined to make short-term investments. I would look for willingness to change specific investments but not philosophy with the times.

3. Resources - I would insist my advisor be associated with other professionals capable of detailed economic and securities analyses.

4. Past Performance - I would like a measure of how well the counselor had done for clients with goals and risk-taking ability similar to mine. I do not like over-all performance graphs since the averaged performance of many accounts distort results and cannot reflect risk. Specifically, what is good performance for a retired widow with $750,000 total assets, is not good performance for a bachelor making $600,000 a year.

5. Availability - I would want to talk directly to the person managing my money whenever I want, within reason. My life and goals, personal or corporate will undergo change and I want my financial affairs to reflect those changes. To do this, we must communicate effectively and the counselor must be flexible.

6. Reporting - I would like regular reporting on the current condition of my account and its progress over time.

7. Continuity - I would look for assurance that the advisor's organization would be available to manage my assets indefinitely. This requires an established organization and that more than one person be familiar with my account.

In addition, I want to satisfy myself that the following conditions in our relationship are present:

1) The counselor and I should have a common goal, that is, the successful management of my money or the money for which I am responsible. I do not want my counselor to sell me anything but advice. Too often financial advisors make their living from the number of products sold. The stockbrokers, insurance salesperson or mutual fund salesperson are cases in point. I do not want my advisor to be serving two masters. At best, it creates a distraction; at worst, it creates a conflict of interest. The financial relationship I want is for a charge of a fixed percentage of money under management. If my account is well managed, I will be satisfied and the advisor will bill me on my larger account next year.

2) I am more concerned with the fee (within reason) being enough to justify my account receiving the time and skill necessary to produce results, than its being too much. With good results the fee is irrelevant, with poor results any fee is too much.

3) I want to be as important to the counselor as he or she is to me. The basis of any meaningful relationship, business or personal, is founded on mutual need. Too many times the purchaser of advice is insignificant to the advisor and the client becomes an account number.

4) I want the counselor to be accountable to me and I want him or her to know it. I do not want specific decisions for my account to be made by some amorphous committee. I want the buck to stop with that counselor. On the other hand, I do not want a superstar acting alone. Too often, the brilliant mind goes overboard concerning an investment, whereas a group of seasoned professionals can furnish balanced judgment.

Here is how and when I would judge an advisor's performance:

A. Is the counselor effectively doing the job agreed upon when we began? Has the counselor remained consistent in philosophy and action?

B. On a more quantitative note, is the current condition of my account and its progress vis a vis other investments and my objectives reasonable? The market value of securities can usually be measured at any time and compared. This kind of measurement is not available to the purchaser of legal, medical or accounting advice. I will look at change in the value of my portfolio versus the change in appropriate indices and also to a measure of inflation.

The next question is when would I measure performance? It is not useful to measure financial track records in a shorter time frame than a year and then only to assess damage. Progress, for all but the highly speculative account, usually is not observable in a shorter period than three years since the vagaries of the market and the dwell time for investments to mature requires at least that long.

In short, when selecting a financial advisor, I would find one who passes a thorough investigation. The advisor's academic background and experience are prime considerations. I would look at the compensation and be convinced that the advisor's best interests are mine. He or she must be willing to work with and talk to me. I would assure myself that the organization has the support people to continuously provide the advisor the necessary information. After I have made my selection, I will trust him or her. I may supply new information about my situation but would avoid blunting this professional's ability by interfering, for after all, that judgment is what I am paying for. Finally, I would measure what the advisor does on a regular basis after allowing adequate time to prove himself or herself.