But even if no hot-button issues have raised their ugly heads, that doesn’t necessarily mean that all is well. If you’ve been with your current advisor for five years — and certainly if you’ve been with him longer than that — you should ask your advisor to do a retrospective on the account. This review should cover at least the following items:
1. Did the initial design of the portfolio (and as it changed over time) actually serve the needs and wishes of the investor? If not, why not? What can or should be done about it?
2. What worked and didn’t work over that period of time?
2.a. Did the portfolio outperform its custom benchmark over the period on a adjusted basis? A custom benchmark consists of the investment sectors included in the portfolio design and at the same percentages. Each sector is measured against the benchmark for that sector. Note that failure to outperform the custom benchmark, unless the margin is wide, shouldn’t be a deal-killer. The most important job of the advisor is to get the custom benchmark right for the family. Far better an advisor who gets that right and then somewhat underperforms the benchmark than an advisor who beats a benchmark that was wrong for the family.
2.b. In the aggregate, did the managers and funds selected by the advisor outperform or underperform their benchmarks? Were there asset classes and sectors where the advisor’s managers were consistent out– or under-performers? This might help inform how those market sectors should be invested looking forward.
2.c. To the extent that the advisor deviated from the custom portfolio by over– or under-weighting asset classes and sectors, did those tactical bets pay off or not? Note that an advisor whose cautious tactical moves (that is, moving away from over-valued sectors) paid off is probably more valuable than an advisor whose aggressive tactical moves (moving into undervalued sectors) paid off.
2.d. Since taxes represent such a large drag on investment returns, how well did the advisor manage the tax implications of the portfolio’s activities? The advisor should have been taking taxes into account (i) when he designed your portfolio, (ii) in the managers he selected, (iii) as managers were replaced, and (iv) in recommending sensible tax-deferral vehicles and strategies along the way.
2.e. Many families will want to include in the review a number of non-investment issues, including how well the advisor helped educate family members about investment issues, how responsive the advisor was, the advisor’s knowledge of socially responsible investing, and so on.
3. If the advisory world has changed substantially since the advisor was first engaged, are there other types of advisors that might better serve the family’s interests today? (i.e., robo-advisors.)
4. If the family itself or its financial circumstances have changed since the advisor was engaged, is the current advisor still appropriate? For example, is decision-making responsibility passing to a new generation? Has the family’s asset base grown or shrunk substantially, so that the family no longer fits into the advisors sweet spot in terms of his experience and the nature of his other clients?
Assuming that we have completed our review as outlined above and have decided that the time has come to part company with our advisor, that doesn’t mean that we are quite ready to terminate the relationship. Before we do that, we need to identify a replacement advisor.
Consider the analogy to a money manager. If we decide to terminate a small cap manager, for example, we don’t want our securities to be sitting around unmanaged for a period of time, nor do we want to have to convert them to cash (and pay the taxes and transaction costs). We want to identify a new small cap manager, transfer the existing securities to that firm, and let them keep the stocks they want and sell the ones they don’t in as tax– and cost-efficient a manner as possible.
This goes in spades for an overall financial advisor. Searching for and engaging a new advisor is a time-consuming process, and we certainly don’t want our financial affairs to remain on autopilot during that period.
In addition, the new advisor can be extremely helpful in moving assets away from the old advisor. It’s a truism in the financial world that getting your assets into an advisor’s hands is always vastly easier than getting them away from him.
Finally, check your written agreement with the soon-to-be ex-advisor. Most agreements require that you give the advisor notice of termination — typically 30 days’ notice. Except in unusual circumstances reputable advisors won’t hold you to the notice period, but if you’re terminating, maybe your advisor isn’t all that reputable.
We’ll finish up this series next week by addressing the question of how to terminate your advisor.
Next up: Firing Your Financial Advisor, Part IV