Investors increasingly have fees on the brain when it comes to the financial services they use, leading some to wonder how much value their investment advisor is adding to their portfolio. It can be a fuzzy area to measure, but a company called GradeMyAdvisor (GMA) has rolled out an online service to help quantify it.

Based in Galveston, Texas, GMA holds that investment management fees can be a serious drag on performance that erodes retirement nest eggs over time. GMA analyzes portfolios and their managers on a risk-adjusted basis and assigns grades; the best scores go to portfolios achieving a higher return than the benchmark with less risk.

“We’re only measuring investment skill,” says Norman Pappous, GMA’s co-founder and president. “The other services provided by advisors are something that’s subjective between the advisor and the client.”

While the program targets retail investors, the company also believes its methodology can benefit investment advisors by providing a metric they can use to show clients how much value they’re adding on the investment side. One of GMA’s goals is having financial advisors use it in place of their existing performance recording. “The model for it is Morningstar, which standardized performance reporting for mutual funds,” Pappous says.

Here’s how it works:

An individual creates a profile containing information about themselves, their portfolio and their advisor. Portfolio numbers are provided via Yodlee, a data aggregator that provides historical data going back 90 days. GMA says the investment account username and password are never stored, while the portfolio data is stored in a database that’s protected by bank-level security protocols.

Investors choose from one of five GMA-developed benchmarks as a default. From there, the company provides a 90-day snapshot of how the portfolio performs against the benchmark by employing algorithms produced in-house that account for any deposits or withdrawals to the account. That enables it to gauge portfolio performance on a dollar-growth basis against the benchmark. Then it applies a proprietary risk algorithm to show a portfolio’s risk/reward dynamics. 

“We use a standard deviation model that lets people intuitively understand if they’ve taken more or less risk than their benchmark over the previous 90 days,” Pappous says. 

Lastly, investors get a scatter-plot graph showing them where they are relative to their benchmark and peers. 

Pappous’ résumé includes jobs in the institutional and retail investment worlds with ABN Amro Futures UK and Close Bros. Fund Management in London; with Rydex Series Trust in Rockville, Md.; and as a financial advisor for UBS and Merrill Lynch. The idea for GMA came to him in 2003 when he saw the reports his parents got from their financial advisor and realized there was nothing in those reports showing whether the advisor was adding value to the portfolio through his investing skill.

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