How to measure your financial advisor, or not

HOW TO MEASURE YOUR FINANCIAL ADVISOR, OR NOT

Dani el Kal enov , Global Diversi fi ed P artners has a global focus and we're opportuni sti c, but prudent . W e help peopl e t ake cont rol of thei r fi nanci al well bei ng b y educati ng them on the be nefi ts of i nvest ing i n t angibl e assets and b y al t eri ng t hei r percept ion of what “sm art i nvest ing” m eans. Tweet htt ps :/ /t wit t er.com /Dani el Kal enov M an y i nvestors compare t hei r fi nancial advisor's perform ance to t he perform ance of comm on indi ces, such as t he S &P 500 or t he DOW. If t hei r port fol io has out perform ed t he index, t hey m a y feel a sense of confidence.

The y have "beat en the market ." Wh y does t hi s benchm ark ment al it y exi st and at what does it cost t he investor?

Expectations and Benchmarks: A financi al advisor is oft en expect ed t o perform a wi de variet y of t asks: i nvest m ent advisor, ret irem ent pl anner, real est at e confi dant e, t ax counsel or, et c. Benchm arki ng thei r perform ance prim aril y on “beati ng the S &P ” yearl y i s not accurat e, fai r, or even safe.

Let 's get a few t hi ngs st rai ght. A f inan cial ad vi sor i s not the same as an i nves tment advisor. They should not be j udged the sam e. As J osh Brown, fi nanci al pl anner and aut hor of "Backst age W al l St reet " st at ed, "If you're focus ed prim aril y on perform ance," he sai d, " you're asking the wrong questi ons ."

A pl um ber is successful i f he fix es your broken faucet and i t doesn't l eak. A fi nanci al advi sor's success i s never as black and whit e. W orse, the i nvest or and advi sor rarel y d efi ne the benchm arks by whi ch success wi ll be m easured

ahead of ti m e. Is t he advi sor successful if he beats t he S &P by 2%? W hat i f h e charges 1% of yo ur port fol io value and inves ts i n hi gh -priced m ut ual funds? Is he successful i f he lowers your t ax basis from t he pri or year? W hat i f he recomm ends you t o a great att orney? Have you even discussed it?

W hat i f your advi sor had your port foli o al locat ed i nt o 60% sm all caps and 40% pe nn y st ocks? S ure, he beat the S &P , but was the ri sk profil e of your port fol io onl y 2% more ri sk y? Was your advi sor successful? If you answer " yes ," t hen it 's ti m e t o ask " compared t o w hat? "

Self-Directed Investments Outperform: S ucces s vs. risk doesn’t h ave an i ndependent i ndex for compari son. That index res ides wit hin you and your comm on sense.

In an oft en cit ed 2012 surve y, a uni versi t y st ud y found t hat when invest ors us ed a fi nanci al pl anner or advi sor, they achi eved not i ceably l ower returns .

The s tud y concl uded t hat the average indi vi dual investor was m ore effecti ve t han t he financi al planner at m axim izing return.

P rofes sors Andreas Hackethal and Mi chael Hali assos of Frankfurt, Germ any found overal l lower perform ance from advisor m anaged account s. Bott om l ine, t he st udy showed usi ng fi nanci al advi sors had 5% l ower annual ret urns after fees t han account s that were self -m anaged.

How m eani ngful i s 5%? S t art wit h a t ypi cal $100,000 port fol io. Compounded over 30 years, a 7% ret urn versus 12% yi el ds a difference of $2.2 m ill ion.

That m eans having onl y $660,000 in t he bank inst ead of almost $3 m ill ion.

To Ditch, or Not to Ditch: That s ai d, shoul d yo u abandon your fi nanci al advi sor? P robabl y not, prim ari l y becaus e an advisor’s value shoul d be m easured i n m any m ore wa y s t han j ust t hei r i nvest ment perform ance.

J ust li ke t wo heads are usual l y bet t er t han one, havi ng diversi fi ed investm ent opini ons i s advant ageous. Usi ng the servi ces of a fi nanci al advisor t o ease you i nt o reti rem ent , provi de t ax advi ce, est at e pl anni ng, and even to bounce i nvest m ent ideas off of, is a good idea.

However, as Hackethal and Hal i assos rem ind us, doi ng your own research and generat ing your own i nvestm ent i deas i s perhaps t he most si gni fi cant driver of s uccess i n a diversi fi ed port foli o st rat egy.

Your job is t o keep your ears open, fi ll your i nvestm ent opportuni t y funnel wi th as m any i deas as possibl e, and then schedul e regul ar m eeti ngs wi th Bob t o get hi s feedback. B y part neri ng wit h your advi sor i nst ead of depending on him , you wil l t ake your financi al success t o new hei ght s.

Do you have any feedback, personal experi ences, or i deas to share? We w el come your f eedback on our bl og htt ps:// dani el kalenov.wordpress.com/