Relationships Talk

How do you know if you received good investment advice last year from your financial advisor?

Should you feel good about what happened to your investments in 2018?

Is everyone else doing better than you are?

Years in which the markets are down are the best indicators of whether you are in sync with your advisor — and for most investors, 2018 will end up being a down year.

If you are having trouble accepting the loss you experienced, your advisor probably incorrectly gauged your ability to bear risk. In other words, you took on more risk than you can comfortably accept.

Years in which markets are up — and out of the past 10 years that would be most — hide many mistakes that advisors make. Many investors feel that as long as they make money each year, there is no need to look hard at their advisor’s performance.

Here are some thoughts on how you can determine whether you are receiving good investment advice.

It reflects your ability to bear risk

Unfortunately, the only time most investors learn how much risk they are taking is when markets fall. Those investors who are stunned and hurt by how much their portfolio has declined in value were taking on too much risk.

Your advisor should assess your ability to bear risk each year. It should be part of the annual review you receive. It can come in the form of a short quiz, or through discussions about what might have changed during the year.

A new child, marriage, divorce, death, a child entering college (or graduating), job loss or gain all can affect an investor’s ability to bear risk. Yes, you bear some responsibility to share with your advisor when any of these things happen, but your advisor should ask.

Make sure you discuss your ability to bear risk with your advisor every year.

It is coming from a fiduciary

You know whether your financial advisor is a fiduciary, right?

Unfortunately, most investors have no idea what a fiduciary is, much less whether their advisor is one.

Fiduciary advisors are required by law to put your interests first. Most advisors from brokerage firms, banks and insurance companies are not acting as fiduciaries when they give their clients advice. As a result, many end up providing advice that is in their best interests rather than their clients.

Non-fiduciary advisors are generally conflicted and may legally recommend proprietary investment products and investment options that are not in your best interests. Many are required by their employers to recommend proprietary investment options first, regardless of whether it is the best option for their clients.

So how do you find out whether your advisor is a fiduciary?

Make a written request (email is fine) to your advisor. Accept only written responses. If your advisor wants to call to explain because this is a complex topic, say no. Ask where in your contract his or her fiduciary responsibilities are spelled out.

The best way to ensure that you receive unbiased investment advice is to work with an advisor who is a fiduciary for all advice given. Any advisor who works for a Registered Investment Advisory (RIA) firm is required by law to be a fiduciary without limitation for all advice shared.

It is objective

Many mutual fund companies have entered the investment advisory business. Fidelity and Vanguard are two of the most prominent.

Not surprisingly, those mutual fund companies offering investment advisory services tend to overuse their own investment products in client portfolios. In other words, they provide conflicted advice.

You should clearly understand that these firms are asset managers first and foremost. That is their core business. Many lose money providing investment advisory services and view it as just another way to channel assets into their investment funds.

Work with an advisor from an investment advisory firm whose core business is investment advisory services — not banking, asset management, insurance or accounting.

It illustrates a sound process

Your investment advisor should demonstrate a thorough, prudent and understandable process for surfacing investment options for you to consider. At the very least, the reports you receive should show performance, cost and risk for the recommended options. You should be able to easily understand the reports and be able to follow your advisor’s logic in selecting a recommendation.

You should always ask why your advisor thinks a recommendation is a good investment and whether he or she receives any additional revenue if you invest. There never should be any urgency associated with your purchase or sale of any investment. You should be given the time you need to evaluate any recommendations.

It is comprehensive

The advice shared by your advisor should be comprehensive, which means it includes consideration of all your other investments (and your spouse’s). The intent is to avoid becoming over- (or under-) allocated to any particular asset class.

I talk with many investors who have money scattered among a number of advisors. Few effectively coordinate communication between their advisors. Most don’t want the other advisors to know that they have money somewhere else.

The most frequent mistake I see, which is easily corrected, is having separate advisors for each spouse. The second most frequent mistake investors make is not viewing their personal investments as part of their overall investment strategy. This could be bank accounts, 401(k) plan accounts or spousal funds.

Do one of two things: Put all of your investable assets with one advisor, or, commit to communicating effectively with all of your advisors (which is really hard and time-consuming).

It is coming from someone you respect

When I ask investors why they work with a particular advisor, most of them say it is because they trust him or her. When I ask what their advisor has done to earn their trust, most investors say something like, “…well, he’s a really nice guy”, or “…I really like her.” They end up becoming very defensive about their advisor.

There are a lot of excellent salespeople in the investment advisory business. Many are charismatic, fun to be around and great to have a beer with. They may pick up the cost of taking you to a game or buy you lunch or dinner.

None of that has anything to do with providing good, sound investment advice.

Work with an advisor who has an academic background appropriate for investment advisory work. That background should include one or more degrees in finance, economics or investments. Find someone who has earned additional credentials and who is therefore subject to continuing education requirements.

It includes proper monitoring

You should have heard from your advisor during the fourth quarter of 2018. You should not have had to pick up the phone to call him or her. Market events were wild enough for you to question what was going on.

You are busy with your job, family and life in general. You should be able to rely on your advisor to monitor your portfolio and reach out to you when necessary.

I hope your advisor scores well on all of these criteria. Regardless, it is wise to evaluate your investment advisor each year.