Tuesday , 27 September 2016


How Bad Is Your Financial/Investment Advisor? Here Are Some Such Signs

There are two kinds of bad investment advisors: personal-finance3

  1. well-meaning advisors without the wherewithal to keep up with the science of the fast-evolving profession, and
  2. those whose main focus is not on managing their clients’ assets well, but on gathering assets under management in order to grow their own practices.

How do you tell if you’re sitting across from either one of these types of bad advisors in an industry that lacks transparency? [Well, I have done just that with a list of 10 signs that you are working with a bad investment advisor.]

The following article by Elizabeth MacBride (wealthfront.com) has been edited ([ ]) and abridged (…) to provide a fast & easy read.

1.  The investment advisor doesn’t focus specifically on investment advice

Some advisors practice much like the country doctor of old, promising to do everything under one roof, from investment advice to financial planning to tax advice to insurance products. Rare is the firm that can do all those things well; rarer still the single person. In fact, a good advisor will ask you a series of tough questions, ascertaining your goals to make sure she is the right person for the job.

A good investment advisor probably will ask whether you have a solid financial plan, will talk to you about taxes, and may even prompt you to seek outside help but her main focus will be helping you earn returns on your money, and she’ll have the specialized skills required to develop a customized plan of asset allocation and a strategy for finding the best investment products in those asset classes.

2.  The advisor does not speak openly about returns

If your advisor doesn’t speak openly and proudly of the risk-adjusted returns he or she has earned for investors, time to run for the door…Some advisors will say that because they customize portfolios, they cannot provide a composite return. If you hear that, ask for returns on similar portfolios…

What you should be bringing to the table is a reasonable expectation of what good returns look like, especially when a portfolio has been designed to minimize risk. We would all like a compounded, risk-free 8-10% return [but that is] not going to happen. Many investors suffer from the classic investing mistake of focusing exclusively on recent returns or ‘performance chasing’ [but they] must try to understand HOW that return was achieved and be very aware of the risk taken (with volatility only one measure of risk).

3. The advisor touts service instead of returns

Advisors may try to cover up a history of poor returns – or the lack of well-thought-out investment strategies — with a focus on hand-holding and service. Bedside manner may well be important to you but are you willing to pay the fairly high fees – 1-3% of assets – that many advisors charge for a nice bedside manner? What you really should want to pay for are skills that will help you earn a good return on your money.

4.  The advisor promises to customize a stock portfolio for you

An advisor who tells you that she customizes a stock portfolio for her clients is selling you a bill of goods. Rather, advisors should customize an asset allocation for you, and then be focused on buying the best managers for each asset class.

Consider what a customized portfolio might mean: An advisor who favors one client over another with “better” stocks would be acting extraordinarily unethically toward less-favored clients. The stock-customization sales pitch is especially a red flag if the advisor is selling herself as both a financial planner and an investment advisor [because] it takes so much time to be both a stock picker (i.e. analyze corporation’s financial statements, etc., if done correctly) and be a financial planner to retail clients.

5.  The advisor pushes products in which he or she has a vested interest

In the Byzantine world of financial service fees, it’s sometimes hard to tell how and how much an advisor is getting paid. Advisors who receive their compensation from mutual fund companies may be biased to sell more funds to you, just as advisors employed by a financial institution like a bank might be more likely to sell that company’s products, even if they cost you more. A fee-only advisor’s incentive might be to take too much risk, so that your assets grow faster and he earns more in the short term. You’ll need to equip yourself to recognize this sign of a bad advisor.

6.  The advisor is overly reliant on mutual funds

Many mutual funds are expensive… Moreover, mutual funds don’t offer the transparency that investors (and good advisors) need in order to determine which money managers are skilled, not just lucky.

A growing chorus of experts is recognizing that many mutual funds are a bad deal for investors; an advisor who hasn’t kept up with the shift toward low-fee investments, such as ETFs and index funds, isn’t doing his job…

7.  The advisor cannot back up his investment strategies with academic research

…Investors should look for an Investment Policy Statement that outlines how investment decisions will be made, a written plan that explains the investment strategy and a plan for rebalancing the portfolio in case of a major market event… Consider how much better you…[feel] watching the headlines if you had a copy of such a plan.

The investment strategy should be backed up with the growing body of academic research on investing. You don’t have to understand all of those theories, but you need an assurance that your advisor does.

8.  The advisor custodies assets in-house

If you’re working with an investment advisor who directly manages your money, but the money isn’t at a financial institution that sends you statements directly, you may have a problem. Outside custody, as it’s called, provides a level of protection for your money. How can you tell if your assets are custodied outside? Your statements should be coming from a financial institution that you can find and contact…

9.  The advisor is not a fiduciary

Fiduciaries are legally obligated to act in their clients’ best interests. However, many people who call themselves “financial advisors” work for brokerages and operate under the lower suitability standard, which requires them merely to ensure that investments are suitable for the client at the time of the purchase. Many of the financial advisors working for big Wall Street firms are not fiduciaries. Employees of discount brokerages also are not fiduciaries.

10.  The advisor is AWOL and/or condescending

…Does your advisor reach out to you regularly to explain how your investments were holding up and what…[is happening] in the equities market means for your portfolio?…Part of an advisor’s job is convincing you not to bail out of the investment plan when your emotions are pushing you to make a decision that’s likely harmful in the long run.

Communication is a two-way street. All of the experts I interviewed agreed on this: An advisor who doesn’t take the time to listen to you is not doing his job. If your advisor takes the approach that you should just leave everything to him and not worry about it, look out… After a relationship develops, clients sometimes do turn more responsibility over to an advisor or ask fewer questions but that should be your decision, not the advisor’s.

[In addition,] arrogance in an advisor is a bad sign…The relationship [should] be based on humility…It’s OK to say, ‘I’m an investment professional, but I don’t know where the market is going.’”

In conclusion

Now is the perfect time to:

1. determine if the advisor is selling you services that amount to not much more than a smile or is he/she is offering real substance that will help you meet your financial goals. It is important to hold him/her to the highest standards.

2. take steps to understand how your advisor gets paid…[because] you will [then] be aware if the advisor is subtly, or even not so subtly, pushing you to buy investments that will cost you more – and pay them more.

3. ask the advisors to inform you of all of the fees and costs of your investments – in writing – including an estimate of the transaction costs such as brokerage commissions and bid-ask spreads within mutual funds or other pooled investment vehicles.

The original article, written by Elizabeth MacBride (wealthfront.com) has been edited ([ ]) and abridged (…) by the editorial team at munKNEE.com (Your Key to Making Money!) to provide you with a fast and easy read. “Follow the munKNEE” on Facebook, on Twitter or via our FREE bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner)

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