Investor Spring Cleaning

Does Your Adviser Make the Grade?

David Landis

Until last fall, Pam Nintrup thought the financial adviser she had hired two and a half years before was doing a good job. He'd consolidated her and her husband's scattered accounts onto one statement and run computer scenarios to determine whether her goal of retirement by age 60 was achievable. It was, he said. He then suggested a stock-heavy mix of investments to help Nintrup, 57, meet that goal.

But with her portfolio down more than 40% since last December, Nintrup's early-retirement plans are out the window, and doubts about her counselor are mounting. Why wasn't her money invested more conservatively given her imminent retirement? Is the adviser's explanation -- that bonds didn't cushion the stock losses as well as anticipated -- good enough? Why should she stick with the same plan, as he recommends, when it has done so poorly?

Like Nintrup, millions of investors are questioning whether their own advisers have done the right thing in the face of a stock-market collapse that has slashed the value of Standard & Poor's 500-stock index by 35% in the past year. Only 36% of wealthy investors, for example, say their advisers performed well during the recent financial crisis, according to a November 2008 survey by the Spectrem Group, a consulting firm.

It's hard to know how much of that harsh assessment is justified. The yardstick for measuring adviser performance isn't always clear, and with so much riding on the decisions your adviser makes, emotions often get in the way of sound judgment. Before deciding whether to give your own adviser your continued business -- or the boot -- make sure you have good answers to the following questions.

What exactly do you want in an adviser?

Relationships come in many forms, from a broker who recommends individual stocks, to an adviser who invests your entire portfolio, to a wealth manager who oversees every aspect of your financial life. Within those categories are various permutations. The shape of the relationship should be clear from the beginning and spelled out in writing, and you should have a copy of the document. Sometimes known as an investment policy statement, the document should go into detail about your financial situation, what your adviser will do for you, and how he or she plans to invest your money.

Of course, this document cannot be drawn up until you and your adviser have had a long, probing discussion, touching on your goals, tolerance for investment risk, time frame and tax situation. If you haven't had that conversation, consider it a red flag. If you had the discussion but didn't come out of it with a firm grasp of your adviser's plans, there could be bad feelings down the road. "When things go south, an adviser can go back to the statement and say, 'See, I told you that you could lose this much money.' But that's not a good conversation to have," says G. Scott Budge, of RayLign Advisory, in Greenwich, Conn., who helps wealthy clients find financial advisers.

The written agreement should be a clear road map that you can easily follow to determine whether your adviser is taking you down the path he or she laid out. Most important, it should make very clear the risks you will encounter along the way. Nintrup says she and her husband chose a "medium risk" approach after discussions with her adviser. But she didn't equate that level of risk with a potential 40% loss. That's a common disconnect. "A lot of times, clients say they understand percentages, but they don't internalize them," says Stephen Horan, head of private wealth management for the CFA Institute, the organization that grants the designation of chartered financial analyst to investment professionals. "The mark of a good adviser is being able to make those translations."

It's not as easy as it sounds. Investors often don't know, or aren't candid about, how they feel about risk. That's why it's especially important for an adviser to dig deep on this issue. William Spiropoulos, of CoreStates Capital Advisors, in Newtown, Pa., tries to elicit potential clients' true feelings by requiring them to fill out a long questionnaire that asks them to agree or disagree with statements such as, "Factors beyond my control play a big part in stock market investing." Says Spiropoulos: "We try to ask the question four different ways to get to their emotional makeup."

Are your investments performing up to snuff?

Before passing judgment on your adviser's investing acumen, be sure you have all the facts in front of you. You should get regular reports from your adviser showing your portfolio's return in both dollar and percentage terms. These returns should be "time weighted" -- that is, adjusted for amounts that you add or subtract from the portfolio.

Once you've done that, your returns need to be compared with the proper yardstick, preferably one you and your adviser have agreed upon in advance. The S&P 500 is a widely cited benchmark for U.S. stock-market performance, but it may not be the right one for you. Your taste for risk may be far different from the risk level embedded in an index of large-company stocks. And besides, you may have only a small portion of big-company stocks in your portfolio. A blend of stock, bond and cash indexes reflecting a portfolio's mix of those assets may be the right benchmark for some investors.

A better measure is one matched to your particular investment goals. For example, if your adviser determines that you need to average a 7% annual return over the next decade to meet your retirement goals, then judge your portfolio return by that standard. If you insist upon low-risk investments, don't expect to match the returns of your risk-loving neighbor during a bull market. On the other hand, you shouldn't suffer as much as your neighbor during a bear market.

Also, judge your results over a suitable time frame that's at least several years long. Your actual returns will likely exceed your goals in some years and trail them in others. If they diverge widely -- high or low -- from your expectations in any particular period, that may indicate that your portfolio is not well matched to your wishes and needs to be revamped.
That holds true even during an especially severe downturn. The recent collapse of stock prices is unusual but not unprecedented. During both the 1973-74 and 2000-02 bear markets, the S&P 500 fell nearly 50%. If you made it clear you could not tolerate significant portfolio losses, you should rightfully have expected your adviser to factor in a worst-case scenario similar to the one we're going through.

If, however, you were well briefed on the market's risks and chose to accept them, it's not fair to pin all of your losses on your adviser. This is especially so if your adviser advocates a buy-and-hold approach, as most do. "Most advisers are upfront and say that they can't predict the markets and that they're not good market timers," says Horan, of the CFA Institute.

Some advisers do, in fact, shift assets among stocks, bonds and cash according to market conditions, a strategy known as tactical allocation. Susan Moore, an adviser in Alexander City, Ala., put 90% of her clients' assets in cash in early 2008, and they remain in cash today. "I haven't seen anything that indicates we're at a bottom yet," she says. But while Moore's clients have avoided the worst of this bear market, their future results depend on her ability to make the right call on when to get back into stocks.

An adviser can, and should, make adjustments as conditions and your needs change. But don't expect an adviser to change philosophy suddenly when the market shifts course.

When sifting through the wreckage the market has left behind, try to realize that not every holding that lost value was necessarily a bad investment. The distinction is important when judging your adviser's performance. "When you're involved in a market panic, there's a huge difference between capital destruction and portfolio compression," says Spiropoulos, of CoreStates. "Capital destruction is riding Fannie Mae down to nothing. Compression is the difference between Johnson & Johnson six months ago and today. J&J is not going out of business, and I wouldn't be quick to toss it."

Are you getting good value from your adviser?

Fees are a common bone of contention, often because they are poorly disclosed but also because they're a sensitive topic. "It's hard for us, as a culture, to talk about money, and it's no less hard for advisers and their clients," says Budge, of RayLign Advisory.

Even so, a good adviser will disclose at the outset all of the costs and fees a client may face. Most fee-based advisers charge an annual fee based on a percentage of assets managed. These fees typically range from 0.75% to 1.25%, with the percentage decreasing as your assets rise. (Keep in mind that this is in addition to any fees charged by mutual funds or other investments in your portfolio and may come on top of commissions for buying and selling securities.)

Advisers typically deduct these fees from your account on a quarterly basis. You should get a periodic statement showing the dollar amount of the fees. If your adviser offers lower fees for higher asset levels, make sure you know what the break points are. Some advisers may offer advice on an hourly or one-time basis. Expect to pay a rate comparable to what you'd pay a lawyer or an accountant, anywhere from $100 to $300 an hour.

Brokers usually earn a commission on the products they sell to you rather than an asset-based fee, though many are adopting the fee-only model. Commission-based compensation can be particularly hard to measure because these fees can be split many ways and charged on an ongoing basis when a client buys or sells a product. AARP, the advocacy group for seniors, urges investors who pay commissions to demand a written, quarterly statement of the total fees, in dollars, earned by their broker, the broker's firm and affiliated broker-dealers. "Be wary of those who don't want to provide it," AARP warns.

Are advisers worth it?

Fee-based advisers all charge roughly the same rates, so it becomes a question of whether you could save money by doing the same thing yourself. But not everyone has the time or investing skills to manage a portfolio, which requires ongoing research, monitoring and rebalancing. And even knowledgeable investors may find that investing their life savings on their own is fraught with anxiety and emotion. In such cases, an adviser may be well worth the money for the peace of mind he or she brings.

Can you trust your adviser? As with any relationship, intangibles are important in judging the performance of an adviser. It goes without saying that an adviser should return phone calls promptly and respond to requests and queries attentively. The bigger test is a market crisis, such as the one we've been through in the past year. If your adviser is doing a good job, he or she may tell you things you don't want to hear. That's not a bad thing. Ultimately, your adviser's job is to protect you from your own worst instincts. "You want someone who will calm you down when you're agitated and someone you can trust to tell you this is not a moment to rush to cash -- those kinds of things," says Budge. Whether you have enough faith in your adviser to accept that advice and then sleep peacefully at night is perhaps the ultimate test of whether you should continue or end the relationship.

Do a Background Check

Bernard Madoff, who cheated investors out of billions, illustrates how easy it is for charlatans to pass as financial advisers. Madoffs are certainly the exceptions, but you should still take steps to verify that your adviser is honest and plays by the rules.

Look up disciplinary records for brokers at FINRA BrokerCheck, a site operated by the Financial Industry Regulatory Authority, the industry's self-policing agency. Non-broker advisers, known as registered investment advisers, are regulated by the Securities and Exchange Commission. To look up their records, go to and click on "Check Out Brokers and Advisers." You'll find additional information on Form ADV Part II. That form isn't online, so ask your adviser for a copy. RIAs who manage less than $25 million are regulated by state securities agencies. (Go to the North American of Securities Administrators Assocation Web site for more information.)

Advisers who use certain professional designations, such as CFA (chartered financial analyst), conferred by the CFA Institute, and CFP (certified financial planner), awarded by the Certified Financial Planner Board of Standards, can be disciplined if they violate the ethics codes of their organizations. For more details, go to the CFA Institute and the Certified Financial Planner Board of Standards.

(Editor's note: This article originally appeared in the June issue of Kiplinger's Personal Finance magazine.)

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