What you should be asking yourself—and your advisor—while evaluating your portfolio’s 2016 performance.
The end of 2016 brought a mixed bag for the markets. The Dow Jones Industrial Average started the year with the biggest five-day loss in history—down 6 percent. But it ended the year with a major post-election rally that produced a 13.4 percent rate of return for all of 2016. More than 50 percent of the Dow’s 2016 return occurred after November 8 (7.8 percent).
The S&P 500 (9.5 percent) and NASDAQ (7.5 percent) did not fare as well as the Dow, which suggests blue chips outperformed smaller capitalization stocks that have higher representations in the other indices. The bond market was a relative disaster. The more money you had in the bond market, the lower your total rate of return.
Even if your portfolio performed well in 2016, the end of the year is a natural time to evaluate your relationship with your financial advisor. Here’s what you should think about.
What Were Your 2016 Expectations?
Competent, trustworthy financial advisors are responsible for producing performance. They recommend asset allocations and money managers that have the greatest combined impact on the performance of your assets.
On the contrary, salesmen use performance as a sales ploy. They use high expectations to help them sell investment products that produce bigger commissions. And because they are paid at the time of the sale, there are no consequence if they fail to meet the expectations they created. Except you may not buy what they are selling in the future.
So, what were your 2016 expectations? Did you:
- Have a specific number in mind?
- Select a number that reflected how your assets were invested?
- Achieve a rate of return that exceeded 10 percent?
- Deduct expenses from your performance?
Top Four Expectations
Based on years of Paladin surveys, investors have four primary expectations when they rely on financial advisors who will influence or control their investment decisions.
- Competitive rates of return
- Reasonable expenses
- Risk management
- High quality communications
Competitive Rates of Return
What exactly is a competitive rate of return expectation? It all depends on how your assets are invested. If, for example, you’re investing in actively managed mutual funds with a goal of beating the market by outperforming the indices (S&P 500, DJIA). Did your return exceed the market returns net of expenses?
You invest in passively managed exchange traded funds to match the performance of market benchmarks. Did your return match the market return?
If you’re 100 percent invested in the stock market, your expectation is to outperform popular stock indices. Did you do that?
If you’re 50 percent invested in the stock market and 50 percent in the bond market, did your performance exceed the results of popular benchmarks that contain stock and bond investments?
There can be a wide range of risk tolerances based on ages, assets, goals and circumstances. Financial advisors are supposed to obtain this information and determine your tolerance for risk before they make investment recommendations.
For example, 40-year-old investors have a higher tolerance for risk than 60-year-old investors because they have more time to recover losses that occur during down markets. On the other hand, some 40-year-old investors have low tolerances for risk to minimize their risk of negative rates of return.
All the following statements impact your exposure to investment risk:
- Your advisor’s role is to minimize your risk of large losses
- You do not want any negative rates of return
- You use passive investing to limit your risk
- You do not believe it is possible to beat the market over longer time periods
- You do not believe in market timing
The financial services industry has layers and layers of fees. Your advisor should be willing to document:
- The layers of expense that impact you
- Every dollar of expense that is deducted from your account(s)
- Who receives those dollars
- What services you receive for those dollars
This type of documentation is a reasonable expectation. Advisors who provide high quality services for reasonable expenses will have no problem providing this information.
Advisors who charge excessive fees for under-performing products will resist providing this information. First, they may not want you to know how much they are compensated for their advice and services. Second, they may not want you to know the combined expenses that are deducted from your accounts.
High Quality Services
Lack of service is one of the top three reasons why investors terminate their relationships with financial advisors. Sales licenses do not allow stockbrokers to provide ongoing services. Their licenses limit them to selling investment products for commission. If your advisor is a salesman there is a good chance you are dissatisfied with the level of service you are receiving.
On the other hand, financial advisors are paid quarterly fees to provide ongoing services. You should expect high quality services from these professionals.
What are the top three service expectations?
- Easy access when you want to talk to your advisor
- Regularly scheduled contact
- Performance reports
In the past, access and contact usually meant face-to-face contact with financial advisors. However, the need for physical meetings limited investors to advisors in their communities, versus the best advisors.
Today there are traditional financial advisors (brick & mortar), virtual advisors and robo advisors. Only traditional advisors provide face-to-face meetings. Virtual and robo advisors use the Internet and telephone to communicate with their clients.
“Did my financial advisor meet my expectations?” is an important question that has a complex response—there are a lot of variables that impact your relationship. But it’s up to your advisor to meet those expectations, or it could be time to find a new one.