By Xavier Brenner Your relationship with a financial adviser is often a multi-dimensional one. A good money manager is a financial sherpa, a trusted adviser and maybe even a family friend. So how does one step back dispassionately and assess the relationship in a realistic and balanced way? This is more than just about the latest portfolio statement. That's a snapshot, a data point. To really know if your financial adviser is a cut above the rest, you need to dig a little deeper. Here are some key guideposts.
Markets ebb and flow and in the midst of a roaring bull market just about every financial adviser looks good. So the real question to ask is this: How did your adviser fare during fallow periods like 2002, or the shock and awe crisis years of 2008 and 2009, relative to benchmark indices. Remember, you're paying for financial expertise. So it's fair game to ask what you kind of performance you are getting in return.
If you want an even more nuanced view, there are a number of statistics that financial professionals use to assess a portfolio's performance based on return and risk. In other words, it's not enough to know what the percentage gain (or loss) of your portfolio is over a set period of time. You also want to know how much risk your adviser took to get that result. If he or she is employing high-risk strategies and generating average returns, there may be a problem. That's the central idea behind risk-adjusted return analysis and there are a number of statistics such as alpha, beta, standard deviation and the Sharpe ratio that are well worth learning about. Broadly speaking, these mathematical relationships compare the returns of portfolios with different risk levels against a benchmark like the S&P 500 Index and Dow Jones Industrial Average.
Owning Up to Mistakes
We all mess up, and even legendary investors like Warren Buffett stumble from time to time.