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Is it your fault or your investment advisors?

Posted by admin on May 14, 2009 in editorials, Investment Strategy

Even though the market is beginning to pick up again, a lot of investors still have recent negative experiences with their investment advisor. Some members of the investment community counter that any relationship is not a one way street and some degree of personal responsibility needs to be taken by the client themselves.

Who is right?

Depends. I have been a legal advisor (an industry with its fair share of horror stories) and been a client of  investment advisors. Thus, I have sat on both sides of the advisor-client table and I would provide a few brief comments and tips.

HOW DID YOU CHOSE YOUR ADVISORS?

This is where I think the investor more often than not trips up. Like anything else in life, there are good, bad and indifferent advisors. It is your responsibility to find the one that is the best fit and not the most comfortable fit.

More often than not, I hear people pick investment advisors because of proximity, they saw an ad or they got what I call a throw-away referral (a referral given by someone who never used them or knows them casually). In other words, we act out of comfort and not accuracy. For example, my first non-bank account investment was to buy mutual funds through my bank branch because it was down the street- wow, was that a learning lesson!

I would also be remiss not to point out that not all advisors can sell mutual funds and stocks).  Conduct your due diligence of what they can buy and sell for you.

Start right. Even if it means taking longer to find a good advisor, take that time. The good ones often don’t advertise (don’t need to- their word of mouth referral networking is great) and the bad ones sometimes make the most noise. It is like dating- you have to sift through a lot of crap to find a good one.

WHAT IS YOUR INITIAL CONTACT WITH YOUR ADVISOR?

This responsibility is shouldered on both the client and investment advisor. If hiring an investment advisor is a long-term relationship, you just don’t propose to a girl on the first date do you? You enter cautiously and you establish some ground rules.

When I hired my investment advisor, I gave him a part of my portfolio and told him upfront that I was doing this and would transfer the rest if things worked out well. I also said that we needed to meet periodically- in other words, I set some ground rules. I find that clients who gave me reasonable boundaries to work with legally, even if I did not like them, gave a better form to the relationship.

On the flip side, it is really the advisors responsibility to be honest. Investor expectations can be unrealistic. A good advisor does not pour fuel on the fire of those expectations. If the client feels that he should be paid 18% on a guaranteed fixed income instrument, and if the advisor has told them this product may exist only in la-la land, then it is the investor’s responsibility when his result does not meet these unrealistic expectations.

HOW DO YOU DEAL WITH YOUR ADVISOR?

If you manage employees, unless you trust them 100%, you check in with them from time to time right? So why do some people hire an advisor and then never have periodic contact with them to see how things are going? Letting the advisor know you are around and want to talk is the investor’s responsibility. Ask “why?” a lot. Ask “what are all my options?” a lot. Ask “justify your advice” a lot.

The advisors responsibility should ideally: (i) keep in periodic contact (bonus points if you are actually not selling product but doing this to earn trust); (ii) lay out ALL options (not the ones that make the most sense for the advisor only); (iii) educate;  (iv) answer the “what” and “why” questions; and (v) avoid sales pressure tactics.

If you have a salesperson, fire them. If your advisor never calls back, fire them. If you had a terrible boy-friend, you would dump his sorry butt right?

FINALLY…

One final note, I have had very indecisive clients in my time who want me to make the decision. Here is the thing. A good advisor can give you options and tell you what they would do but clients always don’t disclose everything, they are emotionally attached to the issue, they get all sorts of other advice etc. etc. In other words, an advisor does not have perfect information about you.

Thus, at the end of the day, an advisor cannot decide for you. This is your life. You have to take responsibility for the final decision. Use your advisor to give you ALL options and information to arrive at that decision but you have to make it yourself. If you abdicate decision-making powers to your advisor, you are setting yourself up for failure because the decisions that will be made are from someone else’s perspective.