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I try to help with the finances of family members to make sure they are making wise decisions. I have a family member that is invested with UBS, and they have a financial advisor there that they have been with for a long time. He seems like a good guy, but when he makes recommendations on where to invest money, I often look at the funds that he is recommending. Often they are on the lower end of best performing funds in the class.

When I inquired about some of the vanguard funds that I have my own money invested in, he explained that UBS can only purchase ETF funds from other institutions, but not regular funds. Does this mean it's a mistake to use UBS (or any bank limited in its fund offerings from other institutions) as the "wealth management" institution?

For instance he is recommending moving money into HYD which seems to have a higher risk at an average return ( for this asset class )ABHFX seems to have a higher return at a lower risk. Am I missing something?

I know that Morningstar can be off on their assessments, but still. Do these ratings mean anything at all? I'm just trying to make the most educated decisions possible. I also wonder if financial advisors steer clients toward funds in return for something ( no quid pro quo but more subtle ) I've read about this happening in certain circumstances.

  • I fear your question will be closed because you are looking for product recommendations. However, from a general perspective it would seem silly to pay someone to make sub-par decisions. – Pete B. Oct 27 '17 at 15:01
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    I'm not asking for a stock or institution recommendation but rather if my assessment ( certain institutions may limit or impede what you can buy ) is correct. I want to make sure I'm seeing the big picture. – user379468 Oct 27 '17 at 15:05
  • I've edited this question in a way that will hopefully seem more generally applicable than strictly recommending a financial institution - instead by classifying the exact problem that someone may need to watch out for. – Grade 'Eh' Bacon Oct 27 '17 at 15:06
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    @user379468 Note that your question is really 2 seperate ones, and asking about UBS as a wealth management provider is quite apart from asking about whether using Morningstar's risk ratings is beneficial. You may want to try removing the Morningstar element and asking that as a separate question. – Grade 'Eh' Bacon Oct 27 '17 at 15:07
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Answering a more general question: are financial services firms worth the money?

It really depends on the person. Some can contribute regularly to index funds, and do the asset allocation on their own. They are comfortable buying and selling various funds and there is really not that much management to do a Bogle like "3 fund portfolio". All that is needed is an occasional re-balance. This person probably does not need a firm like UBS or many of the others out there.

Some do some active picking of funds and stocks, and also some indexing. Again they are comfortable in doing the right thing and probably don't need a manager.

There are others, however, that need a manager. A friend of mine pulled all of his money out of the market when Trump was elected. He missed out on some nice growth. The extra percentage point that he paid to have an adviser would have been well worth it.

For people who get spooked easily by the market and need things explained over and over, an advisory service is great. My mom falls in that category. I thank God every day for her service as she would otherwise call me with the same investment questions every other quarter.

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For instance he is recommending moving money into HYD which seems to have a higher risk at an average return ( for this asset class )ABHFX seems to have a higher return at a lower risk.

Often [his recommendations] are on the lower end of best performing funds in the class.

Historical Mutual Fund performance has little to no predictive power for future performance so this shouldn't be an immediate disqualification. Some good starting questions for you to evaluate a manager:

  • Does he have solid reasoning behind for these investments?
  • What is his track record? (though this is only lightly predictive of future results)
  • Does he seem to be steering your family member toward especially expensive funds that make UBS more money?

Does this mean it's a mistake to use UBS (or any bank limited in its fund offerings from other institutions) as the "wealth management" institution?

All wealth management institutions have restrictions on possible investments. Obviously, if your relative can't invest in the funds she wants that is an issue.

Do these [Morningstar] ratings mean anything at all?

This has been studied pretty carefully and the academic consensus appears to be that they have no consistant predictive power. Kräussl and Sandelowsky wrote a particularly comprehensive paper on the subject.

  • It makes it very difficult to make any educated decisions, there is no way to determine if he is a better advisor than others because I don't have a history of his performance. And it seems like all of the ratings metrics are flawed as well. I understand that past does not equal future performance, but does that mean all risk and reward metrics are meaningless? I realize this is another question entirely, but it seems like there must be data driven method for determining which funds within an asset class are better investments than others – user379468 Oct 30 '17 at 13:59
  • It is a very difficult problem. Past returns (for mutual funds at least) has been shown many times to be a very poor predictor of future performance. Many risk metrics, however, are rather stable and can be quite useful in building a portfolio. "there must be data driven method.." This is worth a separate SE question. Actually, this was part of my last job. My answer is there are many methods, most are worthless, a few work but generally only temporarily. You should get other points of view, though. – rhaskett Oct 30 '17 at 14:53

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