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Everyone is gunning for the investment advisor. There are now articles on whether to sue investment advisors, how to leave them and whether they provide any value. Some investment advisors have even turned on their own. I am not much for overly broad generalization. Like any other industry, there are good, bad and indifferent members and timing makes a real difference. A good investment advisor hired in August 2008 could have only minimized damage but, without the benefit of context, a loss is a loss in the rear view mirror.
Assuming you have an investment advisor, how long should you give them before deciding to dump them for another or to walk down the DIY road? I am not sure there is a definitive answer but let’s assume that a relationship with an investment advisor is like any other relationship.
If communication issues occur immediately- for example, their advice is not geared towards your stated risk tolerance levels-it may be a sign that perhaps, to using the dating analogy, it is not worth getting past the third date. One hopes in this situation, your entire portfolio has not been handed over to them. Just like dating, one should always keep some secrets.
If clearly stated goals and intentions are communicated and a plan put in place, it would be imprudent to pull the plug quickly on the investment advisor (assuming she is following an agreed upon and reasonable strategy). Study after study shows that low investor return is caused by, among other things, switching strategies quickly. As Jason Zweig commented recently, discount brokerage customers with higher trading volume tend to do worse than their low trading counterparts. With the investment advisor, throw in possibly higher transaction costs and a quick trigger finger initiated by the client may actually not be a reason to dump the investment advisor. Perhaps it is the clients own sense of impatience which is to blame.
Assuming a reasonable strategy is put in place and neither party gets impatient, one would have to give at least 3-4 years to assess the true value of an advisor. Three to four years may seem like a long time but remember my assumptions: (i) a reasonable strategy is in place (built into my assumption of what is reasonable is low cost so the advisor is not eating 3-4 of unreasonable fees); and (ii) neither side gets impatient. I would add one more point, the parties have to agree to meet at least once a year to review and adjust, and not gut, a reasonable plan.
Having sat on the other side of the advisory table, it is a little unfair to criticize the advisor if the client never communicates clearly what they want, the client rarely communicates except when things turn badly and the client has unrealistic expectations. Now, if communication is quite clear and the advisor acts in their own self interest to the harm of the client, the advisor should be punished accordingly. But if a plan and communication is clear, one has to give enough time for a strategy to fully mature.
But, to return to the dating analogy, one cannot be passive aggressive about what you want. The other party are not mind readers and, in a vacuum, will act in their own self-interest. If the investor has no idea what they what then perhaps no advisor should be hired at all and time spent on a little soul searching.
February 18th, 2010 at 8:18 am
I’m not a big fan of advisors, but I have to agree that lumping them all into one lot is unfair. As consumers of financial services, it’s our responsibility to make our goals and risk tolerance level clear to our advisors. I also think it’s important to learn a little bit about investing so that we know when someone tells us to do something that is obviously not in our best interest.
Congratulations on the Globe mention. This is one of my favourite blogs too!
February 18th, 2010 at 11:00 am
There is a chicken-and-egg problem here. With what I know now, I can say that two advisors I used in the past we poor and terrible. But I didn’t know that at the time. Even when I’d learned enough that I decided to “fire” them, I still only had a vague feeling that I was better off without them. Very few people are competent to judge the quality of their investment advisors. They go to an advisor because they can’t handle their investments themselves, and this lack of knowledge makes them incapable of judging their advisors well.
February 18th, 2010 at 10:30 pm
[...] My Wallet wonders how long you should give a financial advisor before you decide to terminate them. Hasta la vista [...]
February 19th, 2010 at 12:06 am
Michael- at what point were you educated enough to know you were better off without the advisors?
2 Cents- thanks for the kind words.
February 19th, 2010 at 11:42 am
Michael said:
“They go to an advisor because they can’t handle their investments themselves, and this lack of knowledge makes them incapable of judging their advisors well.”
I agree but seeing as most ‘advisors’ have minimal training it isn’t to hard to learn what they know. A few months reading blogs, a few choice books, and speaking to a person or two who manages their own investments and I’d say you’re just as qualified as the majority of the experts.
Problem is that most are nervous or afraid of what they don’t know and figure it is too difficult or complex to learn. I was on of them until my foolproof, well diversified portfolio of excellent well performing mutual funds inexplicably tanked. At that point I figured I couldn’t screw up my investments any worse than an almost 50% loss. At least I would save the 2-3% mer.
People don’t change things until they become unbearable. People’s level of tolerance varies but eventually most people will have had enough and look for a better alternative. For some it is a new advisor, for others it will be doing it themselves.
Congratulation on the recognition. It is well deserved.
February 23rd, 2010 at 4:30 pm
My bank is offering me a 5 year floating rate note with fixed rate 3% for the first two years and capped between min 3 and max 7% to the 3months USLIBOR for the year 3, 4 and 5. Am I having a good deal?
February 25th, 2010 at 8:57 pm
This is a great article. I suspect many people who read a lot spend time on their finances can do a pretty good job by themselves.
The one thing I’d say most DIYers miss out is reviewing risk management (insurance). If they are married have kids or self-employed most people have not reviewed this. Generally their idea is to be self-insured which may or may not make sense.