Tuesday, February 12, 2013

Adviser probably has nothing to hide

Sandy Mikalachki deserves better. The investment adviser was featured in an article in The London Free Press written by Hank Daniszewski. Mikalachki sounds like the kind of adviser I admire.

Managing portfolios of half a million or more, Mikalachki is willing to work for a-fee-for-results. He writes on his company website:

". . . a fee is only charged at year end if there is a positive return. The fee is 15% of the return. For example, a year end 10% return would garner a 1.5% performance fee. If the annual performance is zero or negative, there is no fee. In the case of negative performance, like 2008, we would always have to recoup past losses before the performance fee would apply. There is no catch, it is client friendly but we are also confident in our ability to generate attractive returns over time."

But only about half of Mikalachki's clients sign up for the fee for results approach. The other half go with the more common adviser/client agreed management fee. My guess is that these investors are paying an annual charge equal to about one and a half percent of their holdings, in some cases more and in others less.

Why do I say Mikalachki deserved better than the report in the Free Press. Because it is important to not only make money, if you are an adviser, but to beat an accepted benchmark. By keeping his results secret, it makes it appear that there may be something to hide.

The paper tells us a lot about Mikalachki: We know who his father was, we  know who his wife is, we know where Mikalachki went to school, where he worked, but we don't know if his investments beat a benchmark. The paper makes it clear he is honest but they don't make it clear that he is good.

Let's take a look at one respected benchmark for balanced investing. A balanced portfolio is possibly the most common conservative approach to investing. It is favoured because it doesn't suffer the volatility of a pure equity approach. An investor misses the big spikes in gains but also escapes being buried in the hugh trough of losses when the market corrects.

A person investing half a million in the benchmark at the beginning of 2008 would have seen about an 8.79 percent decline in value or a loss of $43,950. The portfolio would have entered 2009 with a balance of $456,050. [Fee for Results: $0]

2009 was a better year with the portfolio earning 9.15 percent or $41,728. It was a good year but not good enough to dig the investments out of the trough. 2010 saw the portfolio starting the year with a balance of $497,778. [Fee for Results: $0]

2010 was not as good a year as 2009 but it did bring the portfolio back into the black with a gain of $43,506. The portfolio had climbed to a balance of $541,284. [Fee for Results: $6193/Portfolio $535,091]

2011 was an even worse year for the benchmark but at least it did not end the year in the red. It made an annualized return of 2.68 percent ($14506), ending the year with $555,790. [Fee for Results: $2151/Portfolio $547,280 ]

There was some recovery in 2012. The benchmark gained 6.4 percent or $34,571 and ended the year with $590,361. [Fee for Results: $2242/Portfolio $580,064 ]

Even if the portfolio matched the benchmark in raw performance, the management fees guarantee it will fall short in the end.

I have a personal benchmark, a balanced mutual fund that I like to watch. I like it so much that I have about 15 percent of my retirement holdings invested in it. It is the TD Monthly Income fund. The most recent MER charged by the fund is 1.48 percent and its annual portfolio turnover is only 6.08 percent.

As you can see, the TD Monthly Income fund beat the benchmark. An investor putting half a million in TDB622 at the beginning of 2008 would have ended 2012 with a gain of $118,314.57 or a total portfolio value of $618,314.57.

As an article examining placing one's investment money in the hands of an adviser, The London Free Press article falls quite short. The big question, the unanswered question, is: "How well has the adviser at the centre of this article done?" Assuming the adviser has done well, putting this information in the article would have only helped the London-based adviser.

Just as an aside, I know an investor with a self-directed portfolio who started 2009 with investments valued at about half a million dollars and is worth about $750,000 today. I am certain other investors have done even better. A lot of money has been made since the crash of 2008.

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