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7 signs that you should find a new investment adviser

Many investors find it difficult to gauge out how their advisers stack up to the competition. Have you hired a rising star or a dud? Figuring it out requires some sleuthing on your part, looking for red flags that indicate the relationship is off the rails.

It means asking some tough, uncomfortable questions of not only yourself but your adviser, say experts. Here are seven adviser sins, telltale signs that the person you picked needs to be replaced.

Lack of trust
One of the first areas to evaluate is trust, according to Robert Goldin, principal of Macgold Direct Inc., in Thornhill, Ont., an investment loss recovery service that conducts forensic audits of investors' brokerage statements.

That's because a relationship between adviser and client can only succeed if there is mutual trust between the two parties, he says. If you have any doubts about your adviser's performance, then "you probably need another adviser. A happy investor doesn't seek a second opinion."

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Poor performance
Kelly Rodgers, a chartered financial analyst at Rodgers Investment Consulting, which helps investors and institutions find money managers, says take a hard look at the adviser's performance. "There is really one reason for investing and that's to make money."

Unfortunately, the best tool for determining performance -- the brokerage statement -- is "notoriously awful." They prevent investors from figuring out how they have done." She says star advisers will have an investment policy in place that sets out your objectives clearly and will use it to build a portfolio geared to your needs.

A good adviser will set a benchmark against which his performance can be measured, says Warren MacKenzie, a principal in Second Opinion Investment Risk Consultants Inc., in Toronto, which provides an independent review of an investor's performance. "If you don't have a benchmark, how do you know (if your adviser is any good)?" asks MacKenzie.

If your adviser hasn't told you what the benchmark is, ask what it is and then see if you have done better, worse or the same. Goldin says if it's worse, "get the reasons why your portfolio hasn't performed as anticipated." There might be a legitimate reason -- for example, your adviser might have a large position in U.S. stocks that are doing well, but the rising Canadian dollar has negated your gains. Either way, it pays to find out.

Takes on too much risk
MacKenzie says a good adviser will build a portfolio that limits your risk, but you need to make it clear what your objectives are and how much money you can stomach losing if the markets tank. "Your portfolio should not be designed to allow you to take as much risk as you can possibly bear; it should be designed to give you the return you need, and no more, with the least amount of risk."

Your adviser should work with you to determine how much money you need to live on and design a portfolio to achieve that. Rodgers explains that it's not always about shooting the lights out. She had one charity whose portfolio manager consistently earned stellar returns on stocks, yet it later fired the manager. That's because the charity needed cash flow to pay its bills, not capital gains, so the manager wasn't doing the job he was hired to do, which was to reduce risk and improve returns on fixed income, she says.

Ignores your wishes
Rodgers suggests asking yourself is your adviser doing the job he was hired to do. If you wanted a financial plan or a savings strategy but the adviser is plying you with stock tips, then it's time to re-evaluate the relationship. "Think of it as a cultural fit," she suggests.

Doesn't change with the times
Your portfolio and exposure to risk should reflect changes in your life as you age, have children, buy a house and work toward retirement. Does your adviser change with the times? If you have the same portfolio you did 25 years ago, then it might be time to revisit your investments to make sure that they are still relevant to your objectives.

Becomes invisible
Goldin says if your adviser is "too busy to speak to you, doesn't return calls and doesn't have any regular meetings, or doesn't take kindly to your investing decisions," those are red flags that the relationship has gone off the rails.

Also, if the adviser is pawning you off to his assistant or junior in the firm, it's a sign that she is "looking for bigger fish" and doesn't value your business, so you should leave.

At a minimum, your adviser should speak with you a couple of times a year, but once a quarter would be better. There should also be an annual review where you sit down with your adviser and review your portfolio's performance and update the adviser on any new developments in your financial objectives so she can modify your investing plan.

Thinks diversification is for sissies
Rodgers says you should examine your portfolio closely to see if it's actually diversified or if you simply own seven banking stocks. Portfolio theory suggests at least 20 to 50 stocks are needed to ensure proper diversification and the investments need to be companies in different sectors of the economy and in different geographical regions.

She adds that if you own seven Canadian equity mutual funds, you are over diversified. With funds, she says, you should ask your adviser to show you the similarity between them. If they hold the same companies, you aren't gaining anything. They should be diverse in management style (growth or value), investing style (small cap or large cap) and geography.

Don't just take your adviser's word, either -- use your annual review to "ask for statistical proof of what the adviser is telling you."

Bailing out
If, after considering the above, you are dissatisfied, then by all means, it's time to fire your adviser. However, that's not an easy task, says Goldin. "You're left high and dry and feel abandoned and don't know who to trust."

Before telling the adviser you are leaving, have a backup plan in place. Shop around for another adviser and make sure you are comfortable with that person and she is willing to take on your business before breaking the bad news to your current adviser. Otherwise, your investments could languish unattended.

The new firm can help facilitate the changeover and the forms you need to file to transfer RRPS and nonregistered accounts.

Jim Middlemiss is a freelance writer and lawyer based in Toronto. He's a frequent contributor to the National Post, Investment Executive and The Lawyers Weekly.

 
-- Posted: May 8, 2006
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