Advisers may no longer be in school, but that doesn't mean they're not still getting graded.
GradeMyAdvisor.com will offer a new online service next quarter to provide investors with a letter grade for their financial adviser, based on a portfolio's investment performance and the level of risk taken to attain that performance.
The service is meant to standardize evaluations of advisers' investment management, thereby providing clients with more transparency around an adviser's skill and the value an adviser is adding to an investment portfolio, according to co-founder Norman Pappous.
He likens GradeMyAdvisor, which is in beta phase, to the standardization Morningstar Inc. achieved for mutual fund performance, but in a retail advisory context. Mr. Pappous aims to launch a similar service for 401(k) investors in the second quarter of 2016, followed by others tailored to robo-advisers, for example.
GradeMyAdvisor critiques advisers with a letter grade — A, B, C or D — reflecting a portfolio's performance relative to a benchmark and its risk relative to that benchmark. An A grade would be earned by the adviser who achieved higher dollar growth in a portfolio relative to a benchmark, while taking less risk. An adviser would earn a grade of D for taking more risk yet yielding less dollar growth.
B and C grades, or those in between, could arise for situations in which a portfolio yields higher growth than a benchmark but also takes higher risk. The letter grade is the work of a proprietary algorithm that Mr. Pappous declined to discuss in more depth.
Having an objective third party provide this sort of analysis is important because investment reports advisers currently provide clients can differ from adviser to adviser, making it difficult to compare their relative investment expertise, Mr. Pappous said.
Further, these reports are produced by the very people being graded, he added.
“It's kind of like allowing employees to grade their own performance reviews,” Mr. Pappous said.
FEAR OF DISMISSALS
Some advisers see value in offering this sort to transparency to investors.
“I think the concept behind it is wonderful,” according to Scot Hanson, financial adviser at EFS Advisors. “Anytime you can give the public or the consumer more knowledge or confidence in what they're doing, the more likely they'll make smart decisions down the road.”
However, Mr. Hanson, along with other advisers, worry about a focus purely on investment performance, which is only a small part of the value added by an adviser.
“This isn't just a game where we're trying to get high returns,” said Lisa Kirchenbauer, president of Omega Wealth Management.
A service such as GradeMyAdvisor's may downplay the importance of other functions advisers serve, by providing advice around comprehensive financial planning and tax planning, for example, Ms. Kirchenbauer said.
Plus, investment performance is becoming a less important aspect of adviser's job, according to David Edwards, president of Heron Financial Group.
Mr. Pappous agreed that investment management is only a sliver of an adviser's job, saying GradeMyAdvisor focuses purely on investment skill and leaves the “non-objective” aspects of an advisory relationship to the client to assess.
“I don't ever want to suggest an adviser should be dismissed because of a grade,” according to Mr. Pappous, who said he hopes it will rather spark a dialogue between investors and their advisers around how their portfolio is managed.
Ms. Kirchenbauer, however, believes dismissal could be an unfortunate unintended consequence of the service.
HOW IT WORKS
After signing up for GradeMyAdvisor, investors are prompted to link their investment accounts. Investors input the name of their broker-dealer, enter the username and password for their B-D's website — information which is encrypted and not stored by GradeMyAdvisor — and select a benchmark.
There are five default benchmarks, ranging in risk level from conservative (a 20/80 ratio of stocks to bonds) to aggressive (an 80/20 ratio), as well as an option to build a custom benchmark asset allocation.
Users' account information gets sent to Yodlee, a data analytics and aggregation firm, which provides GradeMyAdvisor with data from one or more accounts through investors' B-D. That data includes the prior day's ending portfolio value, securities held in the account and their quantities, and the amount held in each position. GradeMyAdvisor also receives transaction history for the previous 90 days.
GradeMyAdvisor analyzes the information and produces three graphs for investors — which plot performance and risk versus the benchmark, and the portfolio's risk and return relative to peers with a similar benchmark. It also produces a letter grade, which advisers won't be aware of unless shared by a client.
Mr. Pappous isn't a stranger to this type of adviser evaluation. He
founded a similar website, EvaluateMyAdvisor.com, which didn't provide its information online or automate them. All the account data was provided by investors in hard copy or Excel file, and it generated a one-time, $500 report. He shuttered it around 2011 due to the need for a more “robust” technology on the back end.
Through GradeMyAdvisor, investors get a free, one-time snapshot on an account based on 90 days of activity, but they have to purchase a monthly subscription — likely between $9.95 and $19.95 when it launches — for a view beyond 90 days and for ongoing monthly reports. Although the 90-day view is a useful snapshot, Mr. Pappous recommends a minimum 36 months as an appropriate time frame for the most accurate analysis.
A subscription also offers enhanced reporting that looks at metrics such as up/down capture ratio, which measure a manager's performance relative to an index as stocks rise and fall. The paid version will also have a monthly rebalancing feature, and the ability to factor in different asset allocation models over a specified time frame if allocations changed.
