5 Reasons to Fire Your Financial Advisor
By Ron DeLegge, Editor
March 30, 2010
SAN DIEGO (ETFguide.com) – In his 2005 letter to Berkshire’s shareholders, Warren Buffett tells a story about a fictional family named the “Gotrocks.” And as the number of financial helpers the family employs grows, the family’s net take from their investments decreases. How can you avoid becoming like the Gotrocks?
Hiring an investment advisor may be one of the most important financial decisions you ever make. Likewise, firing a dead beat advisor should share the same the level of importance.
Here are five reasons to fire a financial advisor:
1) Your advisor has broken the law
Beware of financial advisors that have broken the law or have a history of legal problems, skirting the law, or an long laundry list of unhappy clients. If they’ve faced lawsuits from dissatisfied clients or paid fines for securities violations without admitting or denying wrongdoing – it could be time to say good-bye.
Do you really want to entrust your financial future with questionable characters? You should periodically check your advisor’s Form ADV or form U-5 form to make sure they’re still clean. Likewise, check these same forms if you’re at the point of choosing a new advisor.
Go to http://adviserinfo.sec.gov and type in their last name. Finra.org is another online database where you can learn about your advisor’s disciplinary history.
2) Your advisor has failed to execute your investment plan
One simple way to know if the investments recommended by your financial advisor are making progress is to compare their performance to major stock and bond indexes or benchmarks. Without a point of reference, you’ll never know if your financial advisor is successfully executing your investment plan or not.
The vast majority of investors, even those with financial advisors, consistently underperform key barometers like the total U.S. stock market (NYSEArca: VTI), the total U.S. bond market (NYSEArca: BND) and international stocks (NYSEArca: EFA). If your investments can’t consistently match the performance of major benchmarks, consider finding a new advisor.
3) Questionable experience and credentials
The recent bankruptcy of ex-baseball star, Lenny Dykstra is a textbook example of what can happen when you entrust your money to the wrong people. Despite promoting himself as a successful entrepreneur, Dykstra’s self-proclaimed stock picking “prowess” never matched up with his resume. According to ESPN.com, Dykstra claimed to have a net worth of $60 million but in his Chapter 11 bankruptcy filing he listed just $50,000 in assets with $31 million in liabilities.
What’s the lesson? It’s a good idea to work with a financial advisor that has the required licenses to practice, adequate experience and other credentials that qualify them to render investment advice.
4) Your advisor doesn’t have the same investing philosophy as you
Your financial advisor may have an investment strategy that gives little consideration to low investment costs, tax-efficiency and pure market exposure. Each of these attributes are cornerstones to successful investing. Paying more than you need to pay in fees or taxes is a leading cause of consistent market underperformance.
Likewise, if your advisor has recommended an investment strategy you don’t understand or one that you can’t explain to others, watch out.
In each of these cases, there’s a very good chance your investment philosophies don’t harmonize with each other. Remember: A house that’s divided, falls. You better think twice before working with an incompatible financial advisor.
5) Lack of accountability
Is your financial advisor in regular contact with you? Or do you always have to hunt them down? And when you meet with your advisor, do they make time to discuss the important details of your investment account? Are they taking responsibility for the investment advice they’re giving you? Or do they run and hide because your account has dropped substantially in value?
If your financial advisor can’t handle blame when it’s warranted or if they’re never available to update you about the status of your investments, what good are they?
Beware of “Top Financial Advisor” Lists
Each year Barron’s comes out with its special issue of “Top Financial Advisors.” Unfortunately, the criterion used by Barron’s editors may not necessarily be pertinent to you.
Barron's ranks advisors using three major components: assets managed, revenue produced and quality of practice. (Investment returns are not a component of the rankings because an advisor's returns are dictated largely by the risk tolerance of individual clients.) What’s the problem with Barron’s financial advisor ranking system?
It’s wrong to conclude or even insinuate that advisors with more assets under management or more revenue are somehow better or more qualified than others. In fact, using these deranged standards, probably led some individuals to trust in Bernard Madoff’s giant investment scam. But scams aside, having billions of dollars under management or the highest revenues in the business tells us nothing about a particular advisor’s practice, other than the fact that advisor is a good salesperson.
What does all of this mean to you? If your financial advisor has the highest revenues in the business, it might be time to find yourself a new tour guide because guess who’s pocket those revenues are coming out of? Yours! What worthwhile ranking system would ever construe this to be something positive to investors?
Other warning signs
There are other many other reasons to consider firing a financial advisor. For example, a violation of your trust, a lack of transparency, and career instability are other factors to think about.
A violation of your trust is a serious breach. What if your financial advisor buys investments in your portfolio that you never authorized or previously discussed? Or what if your advisor is investing according to methods that contradict what you’ve agreed upon? What if you’re being charged fees or commissions you never signed off on? It’s probably time to show them the door.
What if your financial advisor is changing custodians or broker/dealers every couple years? Watch out! It could be a sign of career instability. Do you really want to have an unstable job hopper managing your financial future? If they can’t properly manage themselves, how can they manage you? You don’t want your advisor’s constant career moves to create instability for you. Do you really need another account transfer?
Finally, if your financial advisor is not forthright about their compensation and the exact cost of their advice, I suggest you start looking for a new advisor. Do you really want to deal with financial professionals that like operating in the shadows?