Does Your Adviser Make the Grade?

Even if you've lost a bundle, don't be too quick to dump your financial counselor.

From Kiplinger's Personal Finance magazine, June 2009

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?

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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 perform-ance, 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.

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