Five signs
you may need a new advisor
While
originally a three-part series, the topic of advice seemed incomplete without
addressing signs that the advisor-client relationship is unhealthy or breaking
down. Since my article (http://www2.myto.com/money/tidd_fs.cfm?source_id=&id=1057493),
two weeks ago, on how to find a good advisor, I’ve had quite a number of
requests asking for a referral to a qualified financial advisor. Many of these
requests came from people already working with an advisor. That indicates there
are many unhappy clients out there. For those of you questioning if your
current advisor is right for you, pay attention for some useful tips.
Let’s start
with a very basic rule. Nobody works for free; and nobody gets anything for
free. Advisors who tell you their services are free are just blowing smoke. As
you saw in a recent article (http://www2.myto.com/money/tidd_fs.cfm?source_id=&id=1042496),
you pay for advice indirectly, but make no mistake about the fact that you
are paying a fee when you invest in a mutual fund.
An
important part of an advisor’s job is to ensure her clients have realistic
expectations about what to expect in the future. Nobody actually knows what
lies ahead, but basing your retirement plans on overly optimistic assumptions
is bound to end in anger and disappointment. So, what is your advisor telling
you stocks will return over the next ten years? Eight per cent? Ten or twelve
per cent?
Let me
summarize my thoughts on this. We know that over short periods of time, it’s so
difficult to know what drives stock prices. Human emotion and investor
psychology may be the most powerful short-term forces at play. However, over
longer periods, those emotional blips tend to be corrected, leaving fundamental
factors to emerge as true drivers of stock performance.
There are
three big drivers of long-term stock performance:
·
Current
stock valuations;
·
Future
changes in interest rates/inflation; and
·
Future
growth in profits/cash flows.
In my
opinion, rates will likely rise over the next several years; profit growth will
be more moderate than we saw during the 1990s; and stock prices aren’t exactly
cheap right now. Let’s take some of my skepticism out of the equation by
assuming interest rates stay flat and that the 1990s style profit growth is
repeated. In that rather bullish scenario, I think the best we can expect from
North American stocks is about 8% to 9% per year over the next several years.
Overseas stocks may perform a little better. That’s my version of a best-case
scenario.
When you
have a retirement or other investment plan done for you, the rates of returns
assumed should probably range from a worst-case scenario of 5% per year to a
best-case scenario of about 8%. Please don’t take those numbers as law, but use
them as a guideline when having projections done. You don’t want to plan for 10
per cent, then find out you have to work for three more years.
Any advisor
that says you can expect double-digit rates of return may be too optimistic for
his own good, and yours. There is nothing wrong with shooting for that level,
but saying you should expect (and base your plans on) double digits just isn’t
prudent, in my opinion.
Has your
advisor made significant changes to your strategy or investment mix even though
your situation hasn’t changed all that much – aside from being a few years
older? I’m not talking about changing a couple of funds over the years; I’m
talking about a fundamental change in philosophy or significant changes in the
mutual funds you hold.
I know an
advisor that uses one basic system for all of her clients – a proprietary wrap
program. (Check out this longer article [http://www.sterlingmutuals.com/Account_Jan2001.htm]
from a year ago on wrap accounts, which is now available to the public.) The
thing is, this advisor used a fundamentally different strategy with her clients
just four years ago. Not only did the products change completely, the advisor
has undergone a complete philosophical and strategic change in the way client
money is managed. My suspicion in this particular case, is that the advisor is
doing what’s best for her, rather than what’s best for her clients.
This
advisor of which I speak is one individual case, so don’t assume everybody that
makes significant changes is doing wrong by his clients. My point: If your advisor has undertaken such a
drastic change, ask three questions:
·
Why
did you make that change?
·
If
your previous strategy (and investment choices) were so terrible before, why
did you recommend them with such high praise?
·
Does
this strategy change result in a compensation difference for you, or other
indirect benefit?
If your
advisor simply admits to being wrong about the merits of this investment or
that strategy, hear her out. She may simply be speaking with you very candidly.
Admitting mistakes is a difficult thing. At the end of the day, you have to
evaluate the change and go with your gut instinct.
If your
advisor is on a power trip, you might want to run the other way. The power trip
can take two forms. Militant advisors will sometimes downplay the relative
importance of your portfolio value, and losses thereof. I had a relative pay me
a visit recently. He said that the advisor he’d been dealing with for more than
twenty years laughed when expressing his concern over his portfolio’s falling
value. The advisor apparently had such a large portfolio that my relative’s
dollar losses seemed petty, and communicated that very clearly.
In the
past, I’ve spoken to individuals who have been yelled at by their advisors.
These advisors treat your money like it belongs to them. They get defensive
when you ask legitimate questions or inquire about products of which they have
no knowledge. These militant advisors want to make all the decisions with no
input from their client.
Both of
these cases illustrate a blatant disregard for client concerns and the basic
duty that professional advisors owe to their clients.
You may
have a great advisor, but your service level may not be up to your expectations
or has diminished over time. In such an instance, you simply need to
communicate your desire for a higher level of service – i.e. more frequent
meetings or communication.
In some
cases, you may be justified. In others, you might be asking too much. If you
have a mutual fund portfolio worth $50,000, your advisor will have received
anywhere from $0 to $2,500 up front (depending on applicable sales
charges/commissions) and between $200 and $500 per year.
If a lot of
planning work and many meetings were necessary toward the beginning of your
dealings with your advisor, she likely earned that entire up front fee. After
that, the ongoing fee, known as a service or trailer fee, doesn’t really compensate
your advisor for the time needed for more frequent meetings (monthly or
quarterly).
Make your
expectations known, but be realistic about them by considering the fees or
commissions paid to your advisor resulting from the purchase of investment and/or
insurance products.
Okay, so
after all of this, you want to break up with your advisor. If you’ve dealt with
this person for any length of time (three years or more) a courtesy call may be
in order. You don’t have to meet or speak with your advisor prior to moving,
but know that pulling out your account may well trigger a call by your advisor
to find out “what happened”. While some dating dynamics are also at play when
dumping your advisor, most are professional and won’t take your break up
personally. They may not like it, but they’ll likely understand that it’s just
business and leave the door open should you change your mind sometime down the
road.
I must say
that most advisors I know are really good, competent, and ethical professionals.
In all honesty, advisors sometimes get a bad rap because we only hear about the
dishonest and shady characters in the business. The client who gets great
service and is very pleased isn’t telling the securities commission or writing
to personal finance journalists. But for those who may be unhappy, get a second
opinion, and use some of this week’s tips to get a feel for whether or not you
need a change.
Dan Hallett, B.Comm., CFP, CFA is Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, and Manitoba.