Is It Time To Change Financial Advisors?

(Marketwatch) Does recent market volatility concern you? Do you wonder if we’re on the verge of a major downturn, and headed for another recession? Conversely, do you view this as just a small bump in the road that will lead to new all-time market highs? Or are you not worried because you are confident that your financial adviser will take appropriate action if it’s warranted?

Volatility like this can make you question your investment decisions. Conventional wisdom suggests that you should just take a deep breath and remind yourself that market corrections and volatility are part of investing. But this environment is also a good time to reevaluate your relationship with your financial adviser.

I’m not advocating that you necessarily fire your adviser. My intent is simply to provide you with a framework for evaluating them. It is easy to feel good about that relationship when the market is rising, but how does your adviser handle corrections and bear markets? Here are a few tools with which to measure your investor-adviser relationship.

1. Performance

What does good performance really mean? Beating the market? Beating an index? Beating some hybrid benchmark? Or attaining the returns necessary to meet your own financial goals?

If you hired your financial adviser for market-beating performance, then there is a very good chance you will fire them for performance reasons, too. The truth is that your financial adviser has no idea what the future will bring. Will the Dow DJIA, +0.54%  be up or down a year from now? Will emerging markets rise, or might they plunge? What will happen if Brexit can’t be resolved? Nobody really knows the answers to such questions.

While performance might seem like the main reason to hire a financial adviser, that view misses perhaps the greatest value that advisers can provide.

Good financial advisers can guide you through the emotional challenges of investing, and help you maintain the discipline necessary to make tough decisions that are in the best interest of you and your family.

Your adviser should help you establish and maintain an allocation of assets (between stocks, bonds, etc.) that is appropriate for you and your goals. That includes talking you down from the ledge when your emotions threaten to make you do the wrong thing:

•Greed strikes when markets are doing great, and it can cause you to buy near bull market peaks, taking on more risk than you can really afford;

•Fear and panic creep in during volatile and falling markets. They can cause you to abandon your long-term plan, selling stocks when you should be hanging onto them (or even buying more while they’re cheap).

That’s not to say that your adviser should get you consistently sub-par investment results. But as long as they get you reasonable returns (for the amount of risk being taken), you should be more concerned about whether your adviser is answering your questions and providing emotional support when you need it. If they don’t do that, it might be time to reevaluate that relationship.

2. Responsiveness

Consider what the word “responsiveness” means. It is a function of service. When we hire a professional, be it an attorney, a CPA, a general contractor, or a plumber, we screen first for competency and experience.

Read: 8 mistakes to avoid when choosing a financial or tax adviser

The real measure of a “service” provider, however, should be their service. We hire others to provide skills or functions that we can’t or don’t want to do ourselves. Consider going out to dinner, and getting a bad meal. Your server has the ability to greatly impact your perception of that experience—first, by responding with a sincere apology, and then perhaps by offering to exchange the meal, or even drop the charge for that item or the whole meal.

Some things are out of anyone’s control, but in a service industry, especially when your life’s savings are involved, simple things like returning phone calls and responding to emails should be givens, not challenges.

Of course, in this age of text messaging and email, we tend to seek answers immediately, and any other response is perceived as slow. When you call or email your adviser with concern, you should expect a timely response. That doesn’t mean an immediate response, or an instant solution. But it means that they’ve made an effort to acknowledge your concern, even if all they can do is assure you that they are researching the problem or trying to schedule a time to discuss it with you.

3. Financial planning

Do you have a personal financial plan? Are you working with a stock broker or a true financial adviser who emphasizes financial planning, not products? Financial planning is important not only to make sure your assets are properly allocated, but as the focus of your discussions during times of great volatility. If your long-term plan is still on track to reach your goals, it is easier to keep short-term market disruptions in perspective.

Remember, volatility is inherent in investing; it can increase at any time, and instability lasts for unknown periods of time. A good adviser will discuss current volatility in the context of your long-term Financial Plan.

If you do not have a financial plan, now would be a great time to get one.

4. Rebalancing and reallocation

Since no one can predict the future, what tools should your financial adviser employ to help you weather volatile market conditions? One is the importance of rebalancing and reallocating your investment portfolio. These are not magic fixes for market volatility, but they are ways to reduce overall risk.

For example, reducing the portion of your portfolio that is allocated to stocks, and increasing the bond allocation, can help reduce your portfolio’s risk during deteriorating markets. Similarly, shifting money from weak sectors to stronger or more conservative ones can improve risk-adjusted results, while also reducing the ups and downs of your month-to-month account values.

I’m not suggesting that your adviser should make constant, unnecessary changes to your holdings. But neither should they ignore your portfolio. They should make reasonable portfolio adjustments that reflect changing market and economic conditions.

5. Salesperson or fiduciary?

Volatile market environments are great opportunities for investment sales people, who thrive on two natural human emotions. When bull markets are roaring, investors’ desire for even more participation (often called “greed,” but more just excitement to make more money if stocks keep rising) makes it’s easy for sales people to get people to buy more stocks and mutual funds. When everything seems scary and uncertain (like now), on the other hand, sales people capitalize on people’s fear that things will continue getting worse, often by offering them “safe haven” products that pay the sale person substantial commissions.

That’s not to say that safe havens can’t be good solutions. For example, an annuity (especially the “fixed” type) can shift market risk from you to an insurance company. But a sales person might recommend an annuity that pays them a 4% to 6% commission (i.e., if you invest $100,000, the sales person gets $4,000 to $6,000 immediately). There might be a different annuity that is better for you, but only pays a $2,000 to $3,000 commission to the sales person, so you never hear about it. Since the sales person is probably not acting as a fiduciary (which would legally require them to recommend what’s best for you, not themselves), the lure of bigger commissions is strong.

Another safe haven solution might be simply reallocating some of your stock money into government securities or CDs. But those usually pay a sales person very little commission, perhaps only one tenth as much as the first annuity mentioned above. What are the odds that an adviser who is paid via commission will recommend those for you?

Which of the above solutions gets recommended can depend a lot on how your adviser is compensated. If you work with a fee-only adviser who is acting as a fiduciary (i.e., required to do/recommend what is in your best interest), the choice of investment will be more a function of prudent reallocation, and using whichever alternative is best for you, since they get paid the same (a fee, based on the value of your total portfolio) regardless of what they recommend.

If your adviser is not a fiduciary, but instead is a broker or insurance agent getting commissions each time you buy and sell something, ask yourself, “Is this the right time to be changing to an investment that pays him/her a big commission?” Indeed, using a commission-based adviser means that you are the one responsible for knowing/deciding if an investment recommendation is the best thing for you to be doing. A fee-only adviser, on the other hand, works for you (i.e., is paid by your fees, not by commissions from others), and therefore can make that decision for you.

What to look for

A good financial adviser or advisory team will:

• Reach out to their clients, scheduling portfolio review meetings or phone calls;

• Host educational seminars and other events;

• Keep open the lines of communication and be receptive and responsive to your concerns;

• Create and revisit your financial plan, and help you focus on long-term goals during periods of near-term volatility;

• Not try to sell you high-commission financial products (annuities, limited partnerships, “load” mutual funds, etc.);

• Look for the most cost-effective ways of keeping your portfolio appropriately allocated as the environment changes from year to year.

If your financial adviser is doing these things, congratulations. If they are not, then you should consider a change. Periods of great stress and market upheaval are the times when you most need emotional reassurance and communication. You deserve a financial adviser that helps you avoid making impulsive or rash investment decisions, and one who adheres to a disciplined, well thought-out investment approach that adapts as market and economic conditions change. If your financial adviser doesn’t do those things, it might be time to consider making a change.


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