Is it time to fire your investment advisor?

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 conglomerate shares 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 shares. Take a look at your account statements, ask your advisor why you are invested in these funds or instruments. They may be excellent investment vehicles by themselves, but there may be other investments 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 accountant? Does your advisor ask about your pension plan at work? A good financial advisor needs to know everything about your financial life. If your pension plan at work is heavily weighted in bank shares, 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 cheques 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 cheques out properly. For payment of consultation fees, it’s okay to write a cheque directly to your advisor. If the advisor works as an independent, then it may be alright to write the cheque out to him or her personally. However, if the advisor is the agent of a recognised financial services provider, then do not make your cheque 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.

Some time  ago, I had a man come to  meet with me for the first time. He was unhappy with the performance of some of his accounts at another firm. He asked that they 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 he liquidated his holdings at the other firm, he discovered that one of his poorest performing assets was  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.

A word about fees

There’s an old saying that goes, “It takes money to make money.” In other words, in order to make some money, you need to be willing to spend some money. Financial advisors, charge a fee for the service they provide. However, I have encountered people who are adverse to paying any type of fee for financial planning. They would rather have the advice up front for free. Would you go to your doctor or dentist, ask them what needs to be done, and then expect not to pay? Of course not. Financial planners are professional just as doctors and lawyers are. There is a fee for service. That being said, if you find that you are fee-adverse, think about it this way. Many financial advisors charge their planning or retainer fees on an account-balance basis. For example, let’s assume that Greg Advisor charges a one-payment retainer fee to his clients. He bases the fee on their account balances. You, his client, have an account balance of $875,000. The annual retainer fee you would pay is $8750.

As your account balance goes up, so does his fee. But, if your account balance were to decrease, his fee would also. Therefore, the more money you make, the more money your advisor makes. It’s really a win-win situation for both of you because your advisor is going to want to see your account balance increase. He’s going to do everything he can to see that you make more money. And what’s wrong with that? What you don’t want to see is your fee being increased while your account balance is decreasing. It’s understandable to look at the fee amount in the above example as a large amount, but often that money can come straight out of your account, rather than out of your pocket. Financial planning fees pretty much boil down to this: Either you pay or you don’t. Chances are, if you don’t pay for your financial advice, you’re not going to get the quality advice that you need.