YOUR ADVISOR ~ GOOD OR BAD (q)

You’ve gone through the interviewing process with a number of advisors and have picked one. This person seems very knowledgeable, and you feel like this is a good fit. However, the time may come when you decide that your financial advisor is just not the right one for you anymore. That’s okay; it’s perfectly alright to switch advisors if you feel that your advisor isn’t doing the right thing for you. Here are some guidelines to help you make your decision:

Do You Understand What Your Accounts Are Doing and What They Are Designed to Do?

Although no one expects you to become an expert on every aspect of your portfolio, that’s what your advisor is for, you should have some understanding of its components. If your advisor recommends investing in an annuity, make sure you are familiar with what an annuity is. Don’t be afraid to ask questions; it will make you feel better. Be sure you are comfortable with the answers your advisor gives you, as well as with each individual product.

I have a client who invested $20,000 in a real estate investment trust. At the time he purchased it, I explained how they work and the pros and cons of investing in one. I made sure he understood the product. Since then, he has asked me a number of times to reexplain the REIT. While other advisors may become irritated at having to explain the same things time and again, I don’t. I’m glad my client wants to understand his investments.

Does Your Advisor Have Your Best Interests at Heart?

When you review your portfolio, do you think your advisor is promoting his or her own agenda? Or, does your advisor recommend investments that are suited for you? If you understand your investments, then the answer to this question will be easy. This also includes whether or not your advisor is following his or her own instincts, or if that person is basing recommendations on analysts’ predictions. While it’s important for your advisor to have a solid opinion of today’s market, your portfolio shouldn’t be solely based upon what one person thinks. Just because your advisor thinks it’s a good time to invest in commodities doesn’t mean that you should sink your entire retirement fund into that sector. Analysts’ predictions can be right, but they can also be wrong. Rather, your accounts should be based upon your age, risk tolerance level, and circumstances.

Is There a Lot of Activity in Your Accounts?

Many advisors earn their money through commissions, not only when you purchase a product, but also when movements are made within your accounts. Your risk level should determine account rebalancing, not whatever is good for your advisor’s pocket. If you feel there are excess transactions in your account, talk to your advisor about it. The only transactions that occur in your account should be done at your discretion and with your input.

I meet with my clients at least twice per year. This doesn’t mean, though, that I am changing things in the portfolio at least twice a year. I rebalance their portfolios only if they need to be. Changing around your investments more than necessary defeats the purpose of investing, and may actually cause your portfolio to decrease in value.

What Kind of Investments Are You Involved With?

This relates to your understanding of your investments. Many brokers push certain products known as “proprietary products.” These are investments that are managed by the firm the advisor is affiliated with and, thus, will get paid more for. Take a look at your account statements. Do you see a lot of securities that all have the same name (i.e., the XYZ Value Fund and the XYZ Growth Potential Fund)? If so, ask your advisor why you are invested in these funds. They may be excellent funds, but there may be other, similar funds that are better suited for you.

Does Your Advisor Know You Financially?

Have you been asked to show your tax return to your advisor? Is he or she in contact with your CPA? Does your advisor ask about your 401(k) at work? A good financial advisor needs to know everything about your financial life. If your 401(k) at work is heavily weighted in technology stocks and stock funds, your portfolio with your advisor shouldn’t be. Make sure your advisor knows everything he or she needs to know in order to make the best possible recommendations to you. If your advisor doesn’t seem to care, or isn’t listening when you bring it up, it’s time to find someone else who will.

Who Are You Making Your Checks Out To?

There are always stories in the newspapers about unknowing clients getting bilked out of thousands, even millions, of dollars by some financial advisor. Always be sure that you are writing your checks out properly. For payment of consultation fees, it’s okay to write a check directly to your advisor. If the advisor works as an independent, then it may be alright to write the check out to him or her personally. However, if the advisor is the agent of a registered investment firm, then do not make your check payable to the advisor personally.

Who Controls Your Portfolio?

Some firms allow what is called discretionary power. This means that if you consent, your advisor can make moves within your portfolio without consulting you. For some clients, this is exactly what they want, and they are willing to take the risk associated with having a discretionary account. For most, though, discretionary power is a problem.

A few months ago, I had a man come meet with me for the first time. He was unhappy with the performance of some of his accounts at another firm. He asked that we transfer his assets so that I could be his advisor. This man was out of the country quite a bit for business, and had given his advisor at the other firm discretionary control over his accounts. When we liquidated his holdings at the other firm, he discovered that one of his poorest performing assets was a Unit Investment Trust—an investment he didn’t even know he owned! His advisor had purchased it using discretionary power while the man was out of the country.

Although this isn’t a complete list of questions, these are the most important. If you find yourself in doubt about switching, trust your gut feeling. That will be your best guide.