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Evaluate your financial advisor
Sunday, May 22, 2011
Bradley R. Newman, CFP®

While you need to have a good rapport and working relationship with the person, or organization, who manages your portfolio, too often more emphasis is placed the interpersonal relationship instead of the aptitude and ability to do the job that you have hired them to do - effectively manage your portfolio. The recent financial crisis, ensuing recession and ongoing recovery have made it both more difficult and more important to manage your portfolio appropriately. As you turn a critical eye toward managing your portfolio, the real question becomes: "Who is really managing my portfolio?"

Is My Advisor Qualified?

While a good working relationship is important, remember that you're not hiring a golfing buddy or dinner companion; you are hiring someone to manage your portfolio. What you must determine is whether that individual is a qualified investment manager or simply a salesperson. It is critical that you understand how your portfolio will be managed, both philosophically & tactically - be certain to have agreed upon parameters clearly identified in a written Investment Policy. Once the investment management parameters are clearly delineated, it is incumbent upon you to continually verify that the portfolio is being managed in the agreed upon style and parameters.

Don't Assume Decisions Are Made Locally

Even if you are dealing with a local person that has a physical office in the area, in most organizations the investment decisions are being made hundreds of miles away by people who likely know very little about your specific situation. The actual portfolio managers are often housed in the corporate headquarters and the local advisors have little to no input as to how the portfolios are actually managed.

Am I Reliant on One Person?

It is important for you to understand if you are the client of one person or if you have access to combined resources of an entire team; to often there may be the implied promise of a team approach when there is no true collaborative process that exists. Regardless of how many people you see listed on a website or are physically present in an office, make sure you know how many people truly understand the details and specifics of your situation.

What If My Advisor Leaves?

The pace of mergers and acquisitions in the financial industry has increased at breakneck speed over the past three years and has resulted in a high level of advisor turnover. Even locally, many investors have been impacted by changes ranging from Wall Street mergers to the acquisition of private institutions with long-term histories of local management. Regardless of whether you are affected by an individual leaving the organization that you work with or by the organization itself being acquired, you need to reevaluate the reason that you hired them in the first place and determine if the new advisor or the new organization will be able to meet your needs.

Always Remember Why You Are Hiring Someone

I don't want to downplay the importance of the relationship you have with your financial advisor, but always remember that the primary reason that you are hiring them is to manage your portfolio and be your financial advocate. You are hiring someone for their expertise and they need to be able to back up their words with actions; too often clients fail to see the promised expertise result in the actions that are necessary to effectively manage a portfolio. Additionally, don't lose sight of the fact that the hiring process is not a one time decision. You need to continually evaluate the relationship in terms of the service provided and regularly determine if you would be willing hire your advisor again; if not, prepare to start conducting interviews for their replacement.

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