Managing money is hard. We love to think that all financial advisors are greedy players like Leonardo DiCaprio in the movie The Wolf of Wall Street, but the reality is they are not.
It takes a lot of dedication, persistence, and ability to endure humbling experiences to win clients. And once you get the client, managing their money is no picnic.
Most financial advisors’ clients are high net worth individuals who can be emotionally difficult, picky, demanding, and spoiled about their financial expectations. What this means is that much of the advisor’s time and cost goes to managing the client itself, not their money.
While in theory, a financial advisor should make you increase your net worth over the long term, unfortunately this is not always the case. Read on to see if your advisor is doing any of these five things:
Dumping money into “hot” trending funds
Investing is supposed to be a 30 mile long marathon, not a 200 foot long sprint. So why is it that financial advisors are constantly jostling from one fund to the next, buying funds at the all time high right before they collapse back to their fundamentals, triggering all kind of fees and sales loads for their clients?
Unfortunately many financial decisions are motivated by success, preferably quick success, and hot funds can motivate clients to pour more money quickly into the advisor’s business. The more money they get, the more compensation they get, favoring their interests rather than what is best for their clients in the long term.
Did you ever ask your advisor how he or she is compensated? One very possible way is that they are earning commission for trades they make, and this in influencing their recommendations. Advisors who earn a commission for recommending a certain fund may be more motivated to make the trade even if there isn’t a solid basis for it.
Chasing performance is always a risky way to invest because very few people can accurately predict the market. By the time you realize a market trend is ‘hot”, the investment may already be on its way down.
Shifting from one fund to another to chase performance is an inferior approach most of the time because it also generates all kind of load fees and trading commissions. It may even realize losses that the advisor tries to hide in the next “hot” investment. Better to have a long term strategic plan for the account that is grounded in the return and risk preferences that align with the investor’s life targets, and to stick to it. Everyone knows that a solid investment allocation has a big impact on a client’s long term performance, much more than blindly chasing different financial instruments.
Running their business at your expense
Does it seem like your financial advisor is always caught up in meetings with new clients? This seems like a very vicious cycle: leads, sell, serve. Repeat ad infinitum.
The life of a financial advisor is a constant hustle. Many advisors operate on a quota system where they have to gain a certain amount of new clients to keep their jobs. Some advisors outsource the management of their client portfolios – but when they do that, they’re giving away a cut of their profit to someone else.
If your financial advisor is a one man or woman shop, think about how much time they really are spending on your portfolio vs. what they should be. How high do you come on the priority list? Do they seem to be more preoccupied with meeting their new prospects out to lunch than taking care of you and your money?
Read “How Much Time It Actually Takes to Manage Your Own Money” for an estimate of what it really tasks to fulfill the requirements for proper money management.
Putting money into a “naïve” model portfolio
The way your portfolio is structured and allocated has great influence over the long term results you’ll get. Investment companies create model portfolios with different mixes of stocks, bonds, and other assets classes. Each model portfolio aligns with the risk and return preferences of certain types of investors (conservative, aggressive, etc.). Unfortunately some financial advisors will make poor decisions by overriding certain allocation models to achieve better results for their clients, all motivated by the allure of quicker success. Other may play it more safely than is required.
Here are some examples of model portfolios that we feel don’t serve investors well:
- Putting a sizeable amount of your money in some hot trading ETF (ex: Cannabis funds, AI, Big Data) that has returned 30% to date and breaks a new 52wk high every day (performance chasing may cause you to buy at the point that investments are the most expensive)
- Directing 80% of your money into low yield Fixed Income Funds and not taking enough risk in other asset classes (will probably fail to achieve your return targets)
- Funneling 100% of your equity allocation into a few hot tech stocks (puts all your eggs into one basket) to achieve quick short term outperformance
- Putting all your money allocation into some small, illiquid stocks that nobody has heard of (may not be able to redeem your money in a timely fashion if you need to)
- Buying too many ETFs or mutual funds that have expense ratios higher than 1% (with so many funds out there, it’s likely cheaper alternatives are available)
In some cases, this is done because the investment company gets compensated for directing your money into these investments. In other cases the investment choices are based upon short term performance rather than long term, or fail to take into account the other investments in the portfolio.
Regardless of the reason, these portfolios are likely to leave you disappointed or behind in terms of performance.
Neglecting to rebalance your portfolio
We don’t advocate rebalancing for rebalancing’s sake, but when there are new highs or lows in the market the rebalancing “red flag” should go off. Market downturns are times when bargain buying opportunities arise. When the market surges, it’s time to think about pairing down positions that have run up.
Failure to rebalance may not be apparent right away, but over time can cumulatively become a big problem. If not addressed, your portfolio may fall out of alignment with your initial goals. You may also fail to realize well deserved gains.
Sticking to your target allocation takes a lot of time and effort if you’re doing it manually for each client. As a result, many advisors neglect to pay proper attention to their clients’ rebalancing needs.
Are you sure your advisor is on it like on a car bonnet?
Charging too high a fee to pay for expensive lunch with you or their new clients
A financial advisor’s marketing costs can be substantially high, and eventually someone has to pay for it (usually you.) It takes time and a lot of expensive lunches to find you as a client. So charging a high fee to manage your money is required to maintain the business and your relationship with the advisor.
That said, charging high fees are one thing, but are you getting enough back in return?
Even if you are getting a lot of free expensive lunches with your advisor, a financial advisor should invest at least some of the proceeds of the practice into improving your client experience.
Does he or she invest in new technology so you can track your portfolio live, or see what decisive rebalancing actions have been taken very recently? Technology can help boost your need for transparency by providing a live view of how your advisor is managing your money.
What about how are they communicating with you? Do they have a blog where they publish their thoughts about interesting investment topics or current market conditions? Do you get regular weekly updates by email or are they stuck on a printed newsletter sent to your mailing address every quarter? Do they even offer educational events so you can improve your financial awareness?
And one last thing. What is he or she doing in terms of investment research to boost your portfolio performance and find solid investment ideas that will achieve better results than you expected? Does he invest the time to do this or simply buy investment research that everyone else gets? Basically, is he a chef cooking you a gourmet meal, or simply putting microwave dishes on your plate?
Don’t sell yourself short. There are a lot of lower cost options out there. If you’re getting less than full service, why should it cost you full price?