How (Not) to Evaluate Your Financial Advisor

Posted: December 16, 2013 in Uncategorized
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If you’re evaluating your financial advisor based on how your investments have performed during the past year, I have a thought for you. Stop right now.

Don’t! One year’s performance does not a track record make. Of course, it’s a good idea, as today’s Wall Street Journal suggests, to make sure that whatever benchmark you’re using is appropriate. Using a stock benchmark such as the S&P 500 to evaluate the performance of a portfolio that is likely diversified by asset type is a bad idea in the first place.

But the major mistake lies in examining one year’s performance in isolation. When I was a mutual fund columnist for Better Investing Magazine, I advised my readers to go at least five years, if not 10, when evaluating the performance of a mutual fund manager. Admittedly, it’s not as easy to benchmark your advisor’s performance as it is a mutual fund, but it’s certainly possible.

As the Journal suggests, look at a blended index and consider whether the performance of your investments is on track to meet your goals as you’ve constructed them with your advisor’s help. Of course, if the performance of your portfolio consistently lags a blended index and isn’t on track to meet your goals and you don’t feel confident in your advisor, it’s certainly a good idea to have a conversation or series of conversations and even look at other alternatives. That’s just common sense.

Here’s another issue — if you rely on your advisor for more than just investment management, judging his or her value solely based on investment management is another mistake. An advisor worthy of the name will offer many other services to help you manage the full gamut of your financial life, from financial planning to budgeting to retirement planning plus referrals to trusted sources for insurance and estate planning.

Judge the relationship on all of it’s merits and keep the lines of communication open. That’s the best way to evaluate performance on an ongoing basis.

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