Investors are typically loath to change their financial advisors for fear of change, often insulting their advisor because their parents or a friend referred them or being unsure on how to find another one.
Not all financial advisors are alike, though, and many of the designations given to them can be easily obtained by anyone who is able to pass a weekend exam, said Jon Ulin, a managing principal of Ulin & Co. Wealth Management in Boca Raton, Fla. Many of them have obvious conflicts of interest issues, because they sell high commissioned proprietary products and are likely to steer you towards them in order to meet their sales quotas.
Advisors should also help their clients establish an investment policy statement that sets out the individual's return objectives and risk tolerance while factoring in their liquidity needs and tax circumstances, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.
"The IPS sets out the ground rules of the investment process and includes the target asset allocation," he said.
Advisors who are difficult to reach or can not spend enough time to explain how to increase your wealth or a particular investment should be fired.
"The best client is an educated client and a major role of the financial advisor is to educate the client on the whys of the strategy for building wealth," Johnson said. "The biggest reason for switching your financial advisor is if there are any trust issues.
Here are the top 12 reasons to make the switch from your current financial advisor to a new one.
The advisor shouldn't be constantly trading in and out of securities, said Johnson. The fees will add up quickly and often the advisor is recommending stocks that generate high commissions for him.
Investors should be able to comprehend all the investments being offered by their advisor, even the seemingly complicated ones such as leveraged ETFs. If you don't understand the product or how the fees apply, move on.
"If your advisor isn't upfront about what investments and fees you have, this is a red flag," said Krista Schwartz, a financial advisor for Hefty Wealth Partners, an Auburn, Ind. financial planning firm. "Your advisor should be able to explain everything to you and answer any questions you have in simple language. If you feel more confused than when you asked or if your advisor talks down to you, a change might be in order."
Your advisor should outline from the beginning how often you will hear from them about your earnings.
Perhaps you were told you would be contacted by your advisor quarterly and you haven't heard from him once in over a year, said Schwartz. Or you assumed that your advisor would answer your questions directly, but you wind up speaking only with a paraplanner or junior advisor.
"If you feel that the advisor isn't meeting the clearly defined expectations or hasn't given you any expectations at all, it might be time to make a switch," she said. "Or maybe you can't get a hold of them and they don't respond to email/voicemail."
Having access to your financial advisor in a timely manner is critical.
"This is the person who you have chosen to watch over your life savings," Schwartz said. "If the advisor can't provide basic customer service, it might be time to make a switch. It is important to have a general idea of what your investments are doing and to have confidence that if you have a question, the advisor will be able to answer it."
Too many brokers and financial advisors over promise and "under deliver" on their service expectations after you sign up, said Ulin.
"Find out if the advisor offers quarterly face-to-face review meetings and events for you to plug into," he said. "Does the advisor and their broker-dealer offer fintech tools to provide clients with seamless advice, planning and communication services?"
Some advisors are not fully disclosing their inherent conflicts which make it difficult for them to provide truly unbiased advice, said Tim Quillin, a CFA and partner at Aptus Financial, a Little Rock, Ark.-based financial planning firm. In some cases, the advisor might sell insurance and could be biased toward recommending whole life policies.
"The advisor might earn commissions from selling certain mutual funds and therefore push clients into those selections," he said. "More commonly, though, advisors simply charge a percentage of assets under management (AUM) and so are predisposed to recommend that clients deposit funds into their managed accounts versus paying down debt or contributing to employee-sponsored retirement plans."
Ensure that you can trust your advisor and that your choice is not based on the advisor being a friend, neighbor or family member or someone involved in a community organization, who attended familiar schools or colleges or who works for a big company with a recognizable name.
"While we understand this dynamic of trust, we think there's a better way to determine trustworthiness, Quillin said. "We encourage people to evaluate their choice of investment advisor with great care and a healthy level of skepticism. Carefully examine your advisor's conflicts, fees and credentials. Given the financial stakes involved in selecting an advisor, we would err on the side of cynicism. Do your homework and make the advisor earn your trust."
Excessive fees can play one of the largest factors in any investor's portfolio, even if things only become more complicated if a portion of an investor's retirement funds is managed by an advisor. Understanding the myriad set of fees charged is one of the most important factors in increasing a person's retirement portfolio or wealth.
High fees are another good reason to move on from your current advisor, said David Twibell, president of Custom Portfolio Group, an Englewood, Colo. financial planning firm.
"Advisors obviously need to be paid for their services," he said. "While it can be counterproductive to bargain shop when looking for a financial advisor, since you often get what you pay for, there is a limit to how much you should be paying in fees."
An advisor should be able to tell someone exactly what they are paying, how often and to whom, Twibell said.
"Remember, there are many potential layers of fees you can be charged for portfolio management and planning services - management fees to your advisor, expenses paid to the fund companies you may use in your portfolio, load fees assessed against your account for access to certain mutual funds, etc.," he said. "If your advisor is reluctant to give you a full accounting of all fees you're paying, it's a good sign you're paying too much."
When advisor charge their clients based on the amount of assets under management, they add up quickly as your net worth increases. An individual with $500,000 in stocks and bonds in an account managed by a financial advisor is likely to be paying $5,000 per year or more in advisor fees, said Quillin. Many investors overlook these fees, because they are automatically deducted from their account.
Investment management has become "so commoditized with advancements in technology that the amount of work being done by a traditional investment advisor typically does not justify the 1% to 1.5% they are charging," said William Rosen, vice president of BRIX Wealth Management, a New York-based financial planning firm.
Choose an advisor who is offering proactive advice and comprehensive financial planning.
"If a client with a $1 million returning 6% annually is being charged an industry standard fee of 1.25%, they will pay $423,372 in fees alone and lose another $289,975 in opportunity cost over 20 years," said Rosen. "It is important for clients to consider whether or not their advisor is earning this compensation."
One concern or red flag would be if an advisor was "constantly trying to get you in a private deal or private placement," said Ron McCoy, a portfolio manager with Covestor, the online investing company, and founder of Freedom Capital Advisors in Winter Garden, Fla. "The fees are big there and usually that is why an advisor would choose to sell them to clients. Fees a lot of times are buried and clients have no idea what they are buying."
The number of flat-fee planners are increasing as the industry is undergoing greater scrutiny and change.
Advisors that work on commissions are to be avoided, said Quillin. Advisors that charge a percent of assets under management are an improvement but still are clearly "incentivized to steer funds into their managed accounts," he said.
The advisors who charge a flat fee or hourly rate are in the best position to help evaluate a range of planning and investing topics, including loan repayment, college savings, term life insurance and company 401(k)s, Quillin said.
There's never been a better time to do-it-yourself because of platforms which are easier to navigate and help investors visualize their holdings and asset allocations. A wide range of index funds and mobile apps have also made trading faster and more reliable.
In addition, there are "insightful financial blogs and forums like White Coat Investor and Bogleheads," he said.
The number of flat-fee financial planners has risen and many communicate with their clients during evening and weekend hours via Skype or Google Hangouts.
"You can do it yourself, but you don't have to do it alone," Quillin said.
If you're a Millennial investor or someone who got started later, fire the investor your parents use, said K.C. Ma, a CFA and director of the Roland George investments program at Stetson University in Deland, Fla.
"Millennials need a Millennial financial advisor, if they need one at all," he said.
If your advisor follows any of these strategies, then it means your advisor is putting their own interest before yours, Ma said.
You should find a new advisor if they believe in the following:
- Ask you, a 30-year old, to buy municipal bonds for your IRAs. "You don't pay taxes on your IRA returns, but owning bonds you receive a lower yield," he said. "The advisor collects a high sales commission."
- Ask you, an 80-year old retiree, to buy municipal bonds for your IRAs. "Your tax bracket is so low, so there is no reason to give up before-tax yield, but the advisor collects a high sales commission," Ma said.
- The advisor still charges you like they charge your parents - a $50 ticket charge plus $80 commission for a $5 e-trade transaction, he said.
- The advisor still charges you 2% annual management fee, when robo advisors charge you a $50 flat fee per year, Ma said.
- The advisor still recommends that you buy high load, high 12-b1, which is an annual marketing or distribution fee, for ETFs or mutual funds.
Fire your financial advisor, when you think he is too "good" of a salesman, because "they start every sentence with 'to be honest with you,' 'trust me,' 'got you,' 'let me be frank with you' or 'I or my wife bought the same stock,'" said Ma.
Or on the flip side, look for a new advisor, he is not good at his job and they start every sentence with "'you are killing me,' 'did you lose some weight?' or 'what can I do?'" he said.
Too many advisors are outsourcing the management of your assets and are merely sales people with sales quotas to meet.
"You may find this to be a novel question, but many brokers and advisors work as more of an 'order taker' and outsource the management of their client's portfolios to third party money managers, insurance companies and other commissioned products," said Ulin. "This approach may be suitable for some of your nest egg but not the lion's share."
Many titles used by advisors are not accredited designations and can be acquired with a minimal fee and weekend exam, said Ulin. One of few trusted, accredited designations would be that of a Certified Financial Planner practitioner, he said. Be wary of the "alphabet soup of fancy initials after many brokers and financial advisors names," Ulin said.
Check out their industry experience and investment philosophy to avoid being fooled by appearances.
"There are many brokers and advisors in their 50s and 60s that just got started out in the financial services industry after being downsized from their own career in other industries," he said. "Do your homework. Look the person up on FINRA's BrokerCheck."
Examine the makeup of the demographic of the advisor's clients to see if they will match your goals and needs.
"Financial advisors cannot be everything to everyone," said Ulin. "Does the advisor specialize in working with Millennials, retirees, doctors, teachers or high tech engineers just like you? Make sure to work with an advisor that understands your demographics just like finding the right specialized doctor."
The bottom line is establishing not only a rapport, but trust with your advisor.
"If you suspect your advisor isn't being honest with you it's time to move on," said Twibell. "Trust is of such paramount importance in a financial advisory relationship, there simply isn't any room for ambiguity when it comes to being honest."