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
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."
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,"
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.
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
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
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
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."
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.