Should you dump your advisor?
Five signs you may need a new advisor
While originally a three-part series, the topic of advice seemed incomplete without addressing signs that the advisor-client relationship is unhealthy or breaking down. Since my article, two weeks ago, on how to find a good advisor, I've had quite a number of requests asking for a referral to a qualified financial advisor. Many of these requests came from people already working with an advisor. That indicates there are many unhappy clients out there. For those of you questioning if your current advisor is right for you, pay attention for some useful tips.
1. Free services
Let's start with a very basic rule. Nobody works for free; and nobody gets anything for free. Advisors who tell you their services are free are just blowing smoke. As you saw in a recent article, you pay for advice indirectly, but make no mistake about the fact that you are paying a fee when you invest in a mutual fund.
2. Great expectations
An important part of an advisor's job is to ensure her clients have realistic expectations about what to expect in the future. Nobody actually knows what lies ahead, but basing your retirement plans on overly optimistic assumptions is bound to end in anger and disappointment. So, what is your advisor telling you stocks will return over the next ten years? Eight per cent? Ten or twelve per cent?
Let me summarize my thoughts on this. We know that over short periods of time, it's so difficult to know what drives stock prices. Human emotion and investor psychology may be the most powerful short-term forces at play. However, over longer periods, those emotional blips tend to be corrected, leaving fundamental factors to emerge as true drivers of stock performance.
There are three big drivers of long-term stock performance:
In my opinion, rates will likely rise over the next several years; profit growth will be more moderate than we saw during the 1990s; and stock prices aren't exactly cheap right now. Let's take some of my skepticism out of the equation by assuming interest rates stay flat and that the 1990s style profit growth is repeated. In that rather bullish scenario, I think the best we can expect from North American stocks is about 8% to 9% per year over the next several years. Overseas stocks may perform a little better. That's my version of a best-case scenario.
When you have a retirement or other investment plan done for you, the rates of returns assumed should probably range from a worst-case scenario of 5% per year to a best-case scenario of about 8%. Please don't take those numbers as law, but use them as a guideline when having projections done. You don't want to plan for 10 per cent, then find out you have to work for three more years.
Any advisor that says you can expect double-digit rates of return may be too optimistic for his own good, and yours. There is nothing wrong with shooting for that level, but saying you should expect (and base your plans on) double digits just isn't prudent, in my opinion.
3. Drastic philosophical changes
Has your advisor made significant changes to your strategy or investment mix even though your situation hasn't changed all that much - aside from being a few years older? I'm not talking about changing a couple of funds over the years; I'm talking about a fundamental change in philosophy or significant changes in the mutual funds you hold.
I know an advisor that uses one basic system for all of her clients - a proprietary wrap program. (Check out this longer article from a year ago on wrap accounts, which is now available to the public.) The thing is, this advisor used a fundamentally different strategy with her clients just four years ago. Not only did the products change completely, the advisor has undergone a complete philosophical and strategic change in the way client money is managed. My suspicion in this particular case, is that the advisor is doing what's best for her, rather than what's best for her clients.
This advisor of which I speak is one individual case, so don't assume everybody that makes significant changes is doing wrong by his clients. My point: If your advisor has undertaken such a drastic change, ask three questions:
If your advisor simply admits to being wrong about the merits of this investment or that strategy, hear her out. She may simply be speaking with you very candidly. Admitting mistakes is a difficult thing. At the end of the day, you have to evaluate the change and go with your gut instinct.
4. The militant advisor
If your advisor is on a power trip, you might want to run the other way. The power trip can take two forms. Militant advisors will sometimes downplay the relative importance of your portfolio value, and losses thereof. I had a relative pay me a visit recently. He said that the advisor he'd been dealing with for more than twenty years laughed when expressing his concern over his portfolio's falling value. The advisor apparently had such a large portfolio that my relative's dollar losses seemed petty, and communicated that very clearly.
In the past, I've spoken to individuals who have been yelled at by their advisors. These advisors treat your money like it belongs to them. They get defensive when you ask legitimate questions or inquire about products of which they have no knowledge. These militant advisors want to make all the decisions with no input from their client.
Both of these cases illustrate a blatant disregard for client concerns and the basic duty that professional advisors owe to their clients.
5. Diminishing service
You may have a great advisor, but your service level may not be up to your expectations or has diminished over time. In such an instance, you simply need to communicate your desire for a higher level of service - i.e. more frequent meetings or communication.
In some cases, you may be justified. In others, you might be asking too much. If you have a mutual fund portfolio worth $50,000, your advisor will have received anywhere from $0 to $2,500 up front (depending on applicable sales charges/commissions) and between $200 and $500 per year.
If a lot of planning work and many meetings were necessary toward the beginning of your dealings with your advisor, she likely earned that entire up front fee. After that, the ongoing fee, known as a service or trailer fee, doesn't really compensate your advisor for the time needed for more frequent meetings (monthly or quarterly).
Make your expectations known, but be realistic about them by considering the fees or commissions paid to your advisor resulting from the purchase of investment and/or insurance products.
Okay, so after all of this, you want to break up with your advisor. If you' ve dealt with this person for any length of time (three years or more) a courtesy call may be in order. You don't have to meet or speak with your advisor prior to moving, but know that pulling out your account may well trigger a call by your advisor to find out "what happened". While some dating dynamics are also at play when dumping your advisor, most are professional and won't take your break up personally. They may not like it, but they'll likely understand that it's just business and leave the door open should you change your mind sometime down the road.
I must say that most advisors I know are really good, competent, and ethical professionals. In all honesty, advisors sometimes get a bad rap because we only hear about the dishonest and shady characters in the business. The client who gets great service and is very pleased isn't telling the securities commission or writing to personal finance journalists. But for those who may be unhappy, get a second opinion, and use some of this week's tips to get a feel for whether or not you need a change.
Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at firstname.lastname@example.org
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