How you can tell if you need a new financial advisor.
10 ways to rate your financial adviser (This article was written by Claes Bell on May 26, 2009 and published on cnbc.com) By Claes Bell • Bankrate.com Earlier this year, the stock market fell to a 12-year low, losing 54 percent of its peak value and taking a vast chunk of ordinary Americans wealth with it. In the wake of such big losses, many investors are looking for someone to hold accountable. That has placed financial advisers under the microscope. "From what Ive seen from industry surveys and things like that, a very high percentage of people are re-evaluating their adviser," says David Loeper, chairman and CEO of Wealthcare Capital Management in Richmond, Va., and author of "Stop the Investing Rip-Off." How do you determine whether your adviser has your best interests at heart? By asking questions and doing your homework, says Kristin Kaepplein, director of the Office of Investor Education and Advocacy at the Securities and Exchange Commission. "Even when you are delegating management of your assets, that doesnt mean you dont have to do your due diligence, especially on an ongoing basis," Kaepplein says. The following are five signs your adviser may be a dud -- and, by contrast, five qualities the best financial advisers share. Qualities of bad advisers1. Losses that exceed standard benchmarks.2. Selling products instead of sound advice.3. Maximizing risk regardless of goals.4. Linking past performance to future results.5. Failure to maintain basic investment safety standards. 1. Losses that exceed standard benchmarks One way to identify mismanagement is to compare your losses with those experienced by others with similar goals and time horizons, Loeper says. For example, Loeper recommends that workers planning to retire within the next eight years keep a mix of 45 percent stocks and 55 percent bonds. Such a portfolio would have resulted in a mere 12 percent loss last year, he says. "If youre within 10 years of retirement and you lost more than 12 percent, somebody was making needless gambles with your money, and thats a warning sign I would look for," he says.
2. Selling products instead of sound adviceA lot of advisers are just glorified salesmen paid by commissions based on the type of investmentsthey sell, says Certified Financial Planner Steve Pomeranz, who also hosts the radio show "On theMoney" on National Public Radio affiliate WXEL-FM in West Palm Beach, Fla.If an adviser begins a conversation with a sales pitch for a specific product, its time to look forsomebody new."Its like you go and see your doctor, and he says, I think youre going to be good for chemo,"Pomeranz says. "Well, wait a minute, doctor, you havent even talked to me yet. You havent doneany tests. How do you know?"Loeper agrees that many advisers who are paid on commission have a financial incentive to steerclients into inappropriate investments. Fortunately, the financial crisis has given people a "dose ofreality" about how much they should trust advisers, he says. "Its not like the pendulum has swungcompletely to people being overly skeptical. People are just becoming as skeptical as they should havebeen," says Loeper. "Theres not a sales pitch out there thats used on math by the financial services-peddling industry that hasnt fallen apart."Most advisers will ask you what your tolerance for risk is, and they will proceed to position you in aportfolio that will ultimately experience that risk, regardless of whether its necessary or not."Such an approach embraces pie-in-the-sky dreams of wealth somewhere down the road rather thanfocusing on the clients long-term goals, such as retirement age and desired monthly income, Loepersays."That means that theyre not evaluating whether accepting that amount of risk makes sense for whatyoure trying to achieve," he says.4. Linking past performance to future resultsWeve all seen the disclaimers at the bottom of the TV screen during mutual fund commercials aboutthe dangers of linking past performance to future results. Still, some advisers try to judge investments-- and sell them to you -- based on last years returns."If (past performance) is not indicative, then why would I look at it?" Loeper says. "A track record isreally only useful to you if you have a time machine, and I havent met anyone who has one yet."5. Failure to maintain basic investment safety standardsAdvisers who push products that dont meet commonsense safety standards probably arent lookingout for your best interests, Pomeranz says.Avoid complicated investments or "anything you have trouble understanding as an investor," he says."If the prospectus is more than a quarter-inch thick, watch out."What should you do if you suspect an adviser may be a lemon? Pomeranz recommends getting asecond opinion.
"You might want to take your portfolio to an independent financial planner who charges by the hour and ask them to do an analysis of the portfolio," he says. "Not necessarily someone whos trying to get your money -- someone who will just do this as a third party for a fee." If the adviser finds your portfolio is really out of whack, its probably time to look elsewhere. During your search, look for these qualities that are common to good financial advisers: Qualities of good advisers1. Identify investing purpose and goals.2. Make sure goals drive investment choices.3. Discuss risk and minimize it.4. Offer objective advice, avoid conflicts of interest.5. Provide good value for fees charged. 1. Identify investing purpose and goals A good adviser sits with clients and identifies goals. Pomeranz starts by asking clients how much income they want investments to generate. "I ask them, What do we need out of this portfolio? What do we want this portfolio to provide us? Whats the purpose of it?" he says. Loeper emphasizes the need to consider all goals -- retirement age, savings rate, retirement income and risk -- equally and independently. "Its not really to define clear objectives," Loeper says. "Its to find a range of ideal and acceptable objectives and then discuss what priorities you have as far as what youd be willing to spend in one objective to buy another that you value more." 10 ways to rate your financial adviser 2. Make sure goals drive investment choices Pomeranz says many inferior advisers are interested in simply maximizing returns -- and their fees -- above everything else. By contrast, a good adviser develops a long-range plan that keeps the clients goals front and center, he says. "A real financial adviser looks at everything and looks at the goals first," Pomeranz says. "Who says you have to be in the stock market? Now maybe you do and maybe you dont, but has anybody asked you the question? I think thats the point." 3. Discuss risk and minimize it A good adviser envisions worst-case scenarios and uses real numbers to better gauge how much risk a client truly is wiling to accept, Pomeranz says. He cites the example of a hypothetical client with a $1 million portfolio made up of 50 percent stocks and 50 percent bonds and fixed-income investments. The client lost 20 percent of its total value in the past year due to stock losses in the U.S. and international markets.
"So now youre down to $800,000, and really, the markets down 40 percent. How much farther is itgoing to go?" he says. "Well, lets say it goes down another 20 percent. And youve got 50 percent ofyour money in stocks right now. Well, youre going to go down another 10 percent, which is another$80,000."How do you feel about that?"Once a clients risk tolerance level has been established, a good adviser works on minimizing suchrisks, Pomeranz and Loeper say.Pomeranz has three minimum requirements for what makes a safe and sound investment: liquidity,transparency and a reasonable or low cost."That automatically eliminates hedge funds because theyre not liquid, not transparent and theyreextremely expensive," he says. "So theres a way to avoid big problems right away."4. Offer objective advice, avoid conflicts of interestA good financial adviser recommends products that best fit a clients needs.Clients who work with a fee-only financial planner increase the odds they will receive unbiased advice,Pomeranz says. Many brokers and financial advisers now feature what are known as "wrap accounts,"which charge a flat monthly fee instead of relying on commissions for remuneration.Pomeranz practices what he preaches. His firm, Steven L. Pomeranz Financial Management, offers fee-only financial planning in Boca Raton, Fla.5. Provide good value for fees chargedRegardless of how a financial adviser is compensated, investors should demand a lot of personalattention and a portfolio tailored to their specific needs, Pomeranz says."Youre getting full implementation of something thats totally customized to your needs, not somecookie-cutter thing," Pomeranz says. "And then youre getting regular meetings to discuss how yourinvestments are doing relative to the market and if theres been any changes in the clients lifestyle --anything that we need to know about in order to make sure that the portfolio still matches what wethought it did."The whole process is a relationship, rather than just some kind of a product-focused answer, orproduct-focused solution."