When Is It Time To Fire Your Financial Advisor?

A 52 week high for the Dow Jones Industrial Average was 18,351. As recently as October 6, 2015, the index was sitting at approximately 16,788 for a decline in value of 8%.

Should you fire your financial advisor if your assets declined in value by 8% or more?

Changing Horses

The termination of a financial advisor should be a well thought-out, rational decision that is based on facts and not emotion. Facts are important so you can make informed decisions.

You should not change horses in the middle of the proverbial stream unless that change is based on your advisor’s failure to meet reasonable expectations. There is no guarantee that the replacement will provide better advice than your current advisor.

Ask yourself the following questions (I have added some perspective for your possible responses.):

1. Risk Exposure

  • Did your advisor lead you to believe your investment strategy would minimize your losses during significant market declines?
  • Did that actually happen or do you believe this was a sales gimmick to gain control of your assets?
  • A high percentage of advisors sell low risk. They know investors do not want to be exposed to big financial losses. But that is your reality if you expect to earn high rate returns. There is no such thing as high returns for low risk.

2. Performance

  • What performance expectation did the advisor create for rising markets?
  • Did the advisor create a performance expectation for a falling market?
  • Many advisors sell “beat the market” performance to justify charging you higher fees. You are willing to pay higher fees if you “expect” to earn higher returns. Beat the market expenses are a major rip-off if you fail to earn the higher returns.

3. Communications

  • How accessible was your advisor during the recent market decline?
  • Did the advisor initiate contact with you?
  • Was the advisor responsive when you initiated contact?
  • Were you comfortable with the amount and type of communication?
  • A lot of advisors disappear during market declines. They do not want to deal with upset clients who want answers. Their strategy is to keep a low profile and hope the market goes back up.

4. Advisor Compensation

  • Do product companies pay commissions to your advisor?
  • Or, is your advisor compensated with a fee?
  • Advisor compensation has a big impact on types of advisors and the services you receive. Advisors who are paid commission by third parties are sales people. They are not paid to provide ongoing advice and services.
  • On the other hand, financial advisors who are compensated with fees are paid to provide ongoing advice and services. Make sure your advisor’s primary method of compensation is a fee.

5. Market Outlook

  • What is your advisor telling you about the future performance of the global securities markets?
  • How will this Outlook impact the investment of your assets?
  • What should your expectations be?

Your advisor’s Outlook will set your expectations for your future results and exposure to risk. All of these investment decisions are based on the advisor’s Market Outlook. If the advisor does not provide an Outlook there is a good chance the advisor is a sales person.

Jack Waymire is a member of the DailyWorth Connect program. Read more about the program here.

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