How to Evaluate Your Financial Advisor

Author: AB Staff

How to Evaluate Your Financial Advisor

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You put a lot of trust in your financial advisor. Trust is a wonderful thing, but sometimes it’s important to think critically as well as emotionally. This is especially true when it comes to your finances.

You trust your advisor, but should you? You can easily figure that out by evaluating him or her. Use these tips to help you effectively evaluate your financial advisor.

  • Don’t Rely on Performance – While performance is important, it’s not a good idea to measure your financial advisor on performance alone. People have a tendency to evaluate their portfolios over short time horizons in which random chances have more of an effect than advisor knowledge or skill. Also, investment performance doesn’t always equate to you meeting or not meeting your goals.
  • Ask About Fees – Fees can be the silent killers of investments and returns. Be sure to include fees on both the underlying investment products (usually the expense ratio on your funds), and the fees your advisor charges. You can use an online calculator like this one to get an idea as to how much the fees are affecting your returns so you can make an accurate assessment for your overall evaluation.
  • Take a Benchmark Approach – Rather than looking solely at performance, you can a make a portfolio-based benchmark to help you better measure your advisor’s progress. A portfolio-based benchmark is made with one or more indexes you specify in advance, and should be easily measurable and realistically followed by an investor. You can create on using an online calculator, or by working with your advisor. Rather than focusing in on underperformance as relative to the benchmark and glossing over outperformance, use the benchmark as a tool to help you understand your advisor’s overall investment strategy. If your advisor’s portfolio is different than their benchmark, you need to determine why. Ask questions like:
  1. Why is there a deviation?
  2. Is this deviation normal, or is something wrong?
  3. Is there too much risk involved in these investments?
  4. How are fees impacting the performance?
  • Try a Goals-Based Benchmark – While a portfolio-based benchmark is great to help you understand your investments, a goals-based benchmark is ideal for illustrating your progress towards your personal financial goals and how your advisor is helping. In order to take this approach, you first need to have clearly defined goals, like paying off a mortgage, saving for retirement, or funding college for your kids. Once your goals are established, you can look at your portfolio through a broader, more long-term lens. Ask yourself questions like:
  1. How has recent market movement impacted my goals?
  2. How does my advisor keep me on track for my goals?
  3. What can my advisor be doing differently to get me to my goals?
  • Use Overall Worth – Don’t forget to take into account any other services your advisor provides when doing your evaluation. Do you love golfing with him on a regular basis? Are her reassuring phone calls after a market tank lifesavers?

Use these tips to help you evaluate your financial advisor. If you find he or she is lacking, you can get help finding a new one from some of our other articles like this one.

How do you evaluate your financial advisor? Share your personal tips below.

Get ready for more financial tip articles coming out soon.