Coach. Counselor. Confidante. A financial advisor can play multiple important roles, helping you build a path toward your major financial goals, develop a personalized investment strategy and emotionally maneuver the ups and downs of the market.
When you have a good one, those planners are worth their weight in gold. But when you’re getting one-size-fits-all service or questionable investment guidance? All of a sudden, it can start to feel like the fees you’re paying are being sucked into a black hole.
So how do you know when it’s time to end your relationship with your financial advisor? Here are some of the tell-tale signs — and how to find an advisor that meets your needs.
1. They don’t seem to understand you or your family’s needs.
A good financial advisor will learn as much as possible about an individual and family before creating an investment program, suggests Harry Grand, who heads the Manhattan office of Angeles Wealth Management. “There should be no discussion about investments until there’s a deep dive and discovery on your current lifestyle, expenses, family members and retirement goals,” he says..
But getting to know a client isn’t a one-time event, either. For example, you shouldn’t have to ask your advisor to model out different strategies for paying a college tuition bill or retiring at different ages — they should be out ahead of those issues, adds Raymond Lucas, senior vice president of financial planning for Integrated Financial Partners. “If their service offering and advice doesn’t evolve, then you know you’ve been commoditized,” he says.
2. Your investments aren’t properly diversified.
Part of an advisor’s job is to create an investment strategy that recognizes the inherent volatility of the markets. If you’re the one noticing a clear tilt toward one asset class or another, a red flag should be going up, says Grand.
For example, Grand points out that U.S. small-cap equities outperformed their larger peers in 2013, 2016 and 2020. And emerging market equities, which focus on regions like Asia and South America, fared better than domestic stocks in 2017. Having an appropriate mix of different categories, including bonds, gives your portfolio needed balance.
“While you’ll never get the biggest gains in any single year, you’ll avoid huge losses,” says Grand. And history suggests you’ll benefit from more consistent returns from one year to the next.
3. They’re not preparing you for what’s around the corner.
Markets are always in a state of flux. So too is the tax code and the body of laws relating to estates. If the person guiding your investments isn’t proactive about navigating those changes, you’re probably not getting your money’s worth. “You should not be the one calling your advisor to discuss your investments or your financial plan,” says Grand.
Higher income-earners, who are typically paying larger advisory fees, should be receiving hypothetical “what if” scenarios to help them prepare for potential tax law changes or a new direction in the markets, says Lucas. “This shows they’re taking all possible steps to prepare you to meet your financial goals,” he says.
4. There’s a Lack of Transparency.
You should know exactly what you’re paying your advisor, which can include advisory fees or commissions they generate from the products they sell. If you’re not getting the clarity you want, it’s probably best to head for the exit sign, says Grand.
While there are plenty of honest commission-earning professionals out there, the fact is that they make more money when they engage in more trades. Being aware of those potential conflicts of interest can help you make informed choices about who’s directing your funds.
Grand also urges special caution when advisors opt for investments that have “lock ups,” which preclude shareholders from selling within a particular timeframe, or back-loaded fees. Investors need to fully understand the terms of the investments and the availability of liquidity.
This proved especially true during the 2008 financial crisis. “Many investors believed that complex plans signaled sophistication and downside protection,” Grand says. “As the crisis unfolded, many people awoke to the harsh realization that they did not understand the intricacy of their investment programs, nor the terms of their investments and the risks associated with them.”
How to Find a New Financial Advisor: What Questions to Ask
So, you’ve decided that your existing advisor-client relationship isn’t working. What now?
If you’re looking for help from another financial planning professional, one of the best ways to get a good one is through a referral, says Lucas. Ask your friends. Put a feeler out on Facebook. A growing number of advisors are seeing clients virtually — a transformation only accelerated by COVID — so you’re not as limited geographically as you once were.
But don’t feel you need to dive into a new relationship. Your advisor is going to play a big role in your financial decisions moving forward, so you need the trust that was missing with your previous professional.
In particular, ask how they gauge success when it comes to your portfolio. And make sure you have a firm grasp of how they’re getting paid, whether through a fee-only structure or commissions on product sales.
In particular, clients should ask whether a financial advisor takes 12b-1 fees, which often fly under the client’s radar, says Grand. These so-called “marketing and distribution” fees that mutual funds fork out to brokers and other investment professionals can cost you up to 1% a year, so they represent a big drag on your investment returns.
Grand also advises clients to make sure that the advisor uses an independent custodian—the entity that actually holds your securities and records each investment transaction. The Bernie Madoff scandal, where a single person managed to both guide investments and keep all the books, was a huge wake-up call about the need for checks and balances, says Grand.
Once you’re decided to proceed with a new financial planner, you can grease the skids by supplying your most recent band and investment account statements, says Lucas. By verifying your holdings, they’ll have an easier time creating a sound plan to help you and yours reach your financial goals.