The stockbroker to portfolio manager trend has been going on for several years and can carry significant risks for investors. (See InvestmentNews, “I’m a rep, I’m a PM, too”). In most broker-as-portfolio-manager programs, the broker has complete discretion to purchase and sell securities (i.e., manage the account) like an investment advisory representative, restricted only by the suitability standard (i.e., the client’s investment objectives and risk tolerance) and other industry rules. Although there are some talented brokers, the main aim of this trend is to increase sales. The broker’s role has traditionally been and remains largely one of sales.
Investors considering whether to use a broker as their portfolio manager are encouraged to take several protective steps. With regard to a broker’s claimed competence as a portfolio manager, one way to assess it is to look for Chartered Financial Analyst (CFA) Institute compliant investment returns in marketing materials and the CFA Charterholder designation for the broker-portfolio manager. CFA Institute compliant returns adhere to a set of standards called Global Assessment Performance Standards, or GIPS. The purpose of the GIPS is to ensure accurate investment performance data that allows investors to make apples-to-apples comparisons of investment performance.
GIPS compliant returns are audited by a third party accounting firm. GIPS compliance advisory firms show their composite returns in marketing material, and often conspicuously point out the money and effort they put into following GIPS. Unfortunately, what GIPS compliant firms perceive as big marketing advantage for them as compared to broker-portfolio managers is often not fully appreciated by the private client investor. Most institutional investors will not even talk to an advisory firm without GIPS compliant returns.
Brokers rarely show returns for the actual portfolios they manage in marketing materials. They may show the returns of one of the outside managers or mutual funds they use, but most are not set up to keep track of performance composites. Skeptics would also argue that brokers don’t publish such returns because they would not be flattering.
J. Boyd Page of Page Perry LLC recommends that investors proceed cautiously before turning over management of their portfolios to anyone. “Portfolio management requires a lot of expertise and many financial tools. It is also fraught with conflicts of interest and temptations. Investors need to be sure that their objectives and risk tolerance are clearly stated to a portfolio manager and that they understand the manager’s expertise, history, strategy, risk controls, and fee structure. Too many investors get burned by accepting things at face value.”
Investors can find more information on the different investment management choices facing private clients at the CFA website.
Page Perry, LLC is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.