When Judging Financial Advisers, Look Beyond the Annual Return

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1 When Judging Financial Advisers, Look Beyond the Annual Return Susan Fulton, founder of FBB Capital Partners, at her office in Bethesda, Md., on Thursday. She uses software that tracks how often her clients have been called and alerts her when a client has not been contacted in a quarter. Credit Matt Roth for The New York Times JAN. 9, 2015 Wealth Matters By PAUL SULLIVAN ANY day now, financial advisers will start sending clients their annual reviews and outlooks along with year-end account statements. Both will probably look pretty good. With the 11.4 percent rise in the Standard & Poor s 500 Index in 2014, chances are most investors saw their portfolios rise in But does that mean their advisers did a good job for them? Answering that may be more difficult.

2 Returns are a piece of the puzzle, said Tom Robinson, managing director for the Americas at the CFA Institute, which administers the chartered financial analyst designation. But I d probably look at those last. What comes before returns when assessing your adviser? Communication tops most lists, but that is a pretty fuzzy thing to measure. Helping clients set goals and then holding them to them is on the list. But so, too, is the humility to admit what they know and do not know. With the new year off to a bumpy start, it is a good time for investors to ask whether their financial adviser is working for them in a meaningful way. RETURNS For most investors 2014 was a good year. Stocks went up and Treasury bonds did not plummet, as experts predicted they would for the third or fourth year in a row. Of course, other investments did not do as well, like oil or the shorter-duration bonds that most advisers suggested their clients buy to avoid Treasury bonds. But what the stock and bond markets do is not something advisers can control. Every investor wants more years of good returns than bad ones. But better advisers are going to get their clients to look away from the ups and downs of the markets and look more deeply at the risk-adjusted portfolio created for that client. Mr. Robinson said advisers should customize benchmarks for individual clients, so they understand how they performed against other investors with a similar risk tolerance. They should create an index and say, here s how you performed relative to that and here s why you underperformed or outperformed, he said. It shouldn t be for the investor to look at straight under- or outperformance. It should be the adviser explaining why they under- or outperformed. Jay Hummel, senior vice president in the advisory services group of Envestnet, a technology platform for advisers, said there were five areas where advisers could make a difference beyond returns: financial planning, asset allocation and selection, investment vehicle selection, portfolio rebalancing and tax management. Being mindful of these, he said, was a way to keep clients away from cocktail party benchmarking." EXPERTISE AND PERSONALITY A tough question to ask your adviser is what he or she really knows. You may be with someone whose advisory practice does not match your needs. Anthony LoCascio, a certified financial planner in Clinton, N.J., said his specialty was retirement income and tax planning, and he hewed closely to that niche. You can t be a jack-of-all-trades, he said. When you go to an attorney, you can have one who closes on your house, but that s not the attorney you want to draft your wills and trusts.

3 He said clients usually come to him in their late 40s or 50s with retirement in their sights. When he analyzes their existing portfolios, he often finds them diversified for risk but not diversified for tax purposes in retirement. This, he said, is the result of previous advisers managing their portfolios for rate of return, not for how those investments can be maximized when there is no longer income coming in. Not surprisingly, Mr. LoCascio does not have many clients in their 20s and 30s. Of course, an adviser s expertise is not always so clear cut. Eleanor Blayney, consumer advocate at the Certified Financial Planner Board of Standards, said investors should look for advisers who are fiduciaries, meaning they put their clients interest first. But they should also look for advisers who admit when they do not know something. A good adviser will draw the line when you have issues beyond their field of expertise, she said. I d be wary of someone who gives advice beyond his area of expertise. CONVERSATIONS Just as important is whether your adviser is calling you often enough, although no one can say what constitutes enough. John Traynor, chief investment officer of the wealth management group at People s United Bank, said he wrote detailed quarterly investment outlooks for 11,000 clients as well as monthly strategy pieces. Portfolio managers are expected to reach out to clients at least quarterly, he said, unless the client indicates otherwise. My largest single client, I have to fight to get on his calendar twice a year, Mr. Traynor said. He s comfortable with that. For some clients, this structure is out of date, since a lot can happen between meetings and correspondence. John Michel, chief executive of CircleBlack, a technology company that helps advisers communicate with clients better, said his firm had created a platform that allows advisers to very quickly send a tailored text or to clients who might have concerns about how investments might be affected by fast-moving events, like the declining price of oil. We found that a couple of communications a month work well, he said. It s the same idea that if an adviser knew you liked wine, he d read Wine Spectator and send you a copy of the article so you knew he was thinking of you. Advisers should also push their clients to be better versions of themselves. Todd Clarke, chief executive of CLS Investments, an asset management firm that gathers assets through advisers, said the best advisers were like personal trainers. If you go to the gym on a regular basis you see improvements, but if you go and use a personal trainer, you re awfully sore the next day, he said. That personal trainer pushes you to excel. An adviser should have that same role to help you create that plan and then maintain that plan.

4 Just as in the gym, not all of the conversations are going to go well. Sometimes your adviser should push back. You know you re working with a good adviser if that adviser is willing to disagree with you or at least explain why your thought process may not be the optimal way to think about something, said David A. Schneider, founder of Schneider Wealth Strategies. If the adviser is only recommending things that the client finds intuitively appealing, I don t want to say that s a red flag, but the adviser is appealing to that client s biases. And when your adviser gets something wrong, he should own up to it. Mr. Traynor said last year his firm got one big call right selling some high-yield bonds to take profits midyear and one big call wrong, on Treasury bonds. But he said the firm explained to clients the intellectual foundation for their calls and why they got the Treasury call wrong. Most people, he said, understood. RESPONSIBILITY Of course, advisers can sometimes only do so much. Susan Fulton, founder of FBB Capital Partners, which manages $850 million for 300 clients, said she used software that tracks how often clients are called and alerts her if a client has not been contacted in a quarter. She said she had to come up with a strategy to deal with clients who are intent on going against the company s investment advice. We tell them we ll open a separate account for them and we ll invest in whatever they want to invest in, and we won t charge for it, she said. We also won t take responsibility for it. Ms. Blayney of the CFP Board said clients who wanted to assess their adviser relationship should ask themselves three questions: What decisions has your adviser helped you make this year? What decisions have we made together? What can he help me with? If it s just going to be decisions about buying and selling, she said, you may want more. Correction: January 9, 2015 An earlier version of this column misstated the 2014 return of the S.&P It was 11.4 percent, not 15 percent. Make the most of your money. Every Monday get articles about retirement, saving for college, investing, new online financial services and much more. Sign up for the Your Money newsletter here. A version of this article appears in print on January 10, 2015, on page B5 of the New York edition with the headline: When Judging Financial Advisers, Look Beyond the Annual Return The New York Times Company

5 Disclosure Adviser cannot assure that the type of securities mentioned in the article will outperform any other investment strategy in the future, nor can it guarantee that such securities will present the best or an attractive risk-adjusted investment in the future. References to an individual security should not be construed as a recommendation to buy or sell that security. Adviser cannot guarantee the accuracy or completeness of any statements or numerical data in the article. Past performance is no indication of future results.