subject: Selecting A New Advisor: Four Factors To Consider [print this page] In a volatile economy, it is more important than ever that you and your investment advisor agree on strategies and tools to maximize your earnings while minimizing risk. Even when the two of you agree, however, sometimes an advisor is no longer a good fit for a particular investor. At that point, it is time to consider a change.
Figuring out when to switch investment advisors is a complicated decision. When faced with that decision, here are some useful guidelines of issues to consider and ways to address them. Common concerns from investors include:
1. I'm not happy with my advisor, but I don't know where to begin looking for someone new. One of the first things an investor needs to do is identify exactly what he or she is unhappy in order to find an advisor with the desired qualities, skills and services.
Here are a few items you want to look at when interviewing new advisors:
Is the advisor fee-based or commission-based? Is the advisor an independent firm or a subsidiary of a larger firm? What is the advisor's track record in terms of meeting client objectives? What continuing education has the advisor done to further his or her planning career, such as the CFP, CFA, ChFC designations? Have any complaints been filed with the governing entities against the advisor, such as the SEC?
2. I am unhappy with my portfolio's performance, but so are most people I talk to. Are my expectations too high?
Go macro then micro. First, take a look at how your portfolio has done versus the overall markets, such as the S&P 500. Have you kept up? Please understand this may or may not be a good litmus test, because a well-diversified portfolio has many more components than the S&P 500.
Secondly, see if the prospective advisor will show you a comparison of your portfolio's individual components versus their relative benchmarks. This will give you a micro view of how your portfolio has done versus actual benchmarks, versus some broad benchmark like the S&P 500.
Next, is your portfolio keeping up with your individual Required Rate of Return (RRR)? We will save an in-depth discussion of the RRR for a future article, but for now, everyone should know that they each have some sort of Required Rate of Return that their investment advisor should be shooting for. Markets will fluctuate, but how has the advisor done over the long term with achieving this goal?
An important point here is that if your advisor designed, for example, a safer portfolio to achieve a long term return of only 5%, than it would not be reasonable to be unhappy if you didn't have annual returns of 15%. With that said, it is important that the advisor and client have clear communication on what the objectives/expectations of the portfolio are, and not simply an objective of "to make money."
All investors should have an idea of their Required Rate of Return, as it is the road map of how they'll get from where they are now to where they want to be over a specified period of time. An analysis of RRR includes such things as a client's available retirement funds, what they are planning to save, an inflationary rate, taxes, expenses, advisor fees, etc. A lot of time can be spent on discussing a client's RRR, but for the sake of keeping this article to a minimum, make sure you have an in-depth discussion with your advisor about calculating this.
3. I am unhappy with the service I receive from my current advisor.
Clearly define all of the things you are not happy with from a service standpoint: frequency of contact, reporting, response to messages, etc. Here are some items to consider when evaluating your current advisor relationship:
How well does your advisor communicate and explain what is going on in your portfolio? How well does your advisor communicate how your portfolio is doing versus the rest of the markets? When the markets go bad, does your advisor go missing, give you the simple "hang in there, it will get better" line, or do they give you a real response of what they are looking for and at what point will they make changes, if at all?
Find out what an investment advisor's service model is BEFORE you engage a new advisor. For example, how often will the advisor communicate with calls, emails, and face-to-face meetings? This will give you to have a baseline of what to expect from this advisor moving forward, and more importantly, allow you to hold them accountable if they do not meet the promised level of service.
4. Go into your advisor interviews prepared with a list of questions, thoughts and concerns. You don't want to find yourself in the middle of a meeting and forget some of your key questions. Be prepared by writing things down. This will help you organize your thoughts and will ensure you are comparing apples to apples when you interview several advisors.
Ask for referrals from the prospective advisors. Even though an advisor probably isn't going to put his or her worst client on this list, it is good to hear from a client's perspective how this advisor is taking care of them.
Check the advisor's background, such as with the SEC website and their CRD number, for any complaints or disciplinary actions against them. Selecting an investment advisor is an important decision. If you are ready to make a switch, consider the above factors carefully to choose an advisor that meets your needs. Good luck!
