No advisor is perfect, but there are a few rough indicators (also see The Quality Advisor’s Alpha/Gamma/Sigma and How to Evaluate an Investment Advisor) that I use to recognize the quality of another advisor. Below are three examples in each category (this is not an exhaustive list), with my favorite simple indicators in bold:
- Does the advisor help the client address things that are important, but that another professional will get paid for rather than the advisor? If not, that tells me they are more interested in a paycheck than in helping the client. Does the financial advisor:
- recommend an umbrella policy? (Most advisors don’t sell P&C insurance.)
- make sure the client’s estate planning is up-to-date and adequate? (Most advisors aren’t estate planning attorneys.)
- review the client’s mortgage(s) to see if refinancing is advisable? (Most advisors don’t sell mortgages.)
- Does the advisor do things that help the client, even when the client doesn’t notice? Virtually all advisors execute on things where the client would notice if they were doing it wrong, but what about if the client would have no idea? Does the financial advisor:
- employ a prudent asset location strategy? Getting the asset location right gets the advisor no credit (except with very rare clients who are very knowledgeable) but is clearly advantageous to the client. It’s also more difficult than ignoring it.
- tax-loss harvest throughout the year or just at year end (or, worse, not at all)? Since investments grow (on average), harvesting economically meaningful losses when they occur is important – they may not exist at year end.
- rebalance the portfolio in a systematic, well-thought-out manner? Many portfolios, particularly smaller ones, are too-often neglected. (While the larger portfolios are overtraded!)
- Does the advisor do things that sound (or look) good but are actually counterproductive? Does the financial advisor:
- recommended small-cap growth funds? Of course that sounds like a great idea – who wouldn’t want to buy small growing companies? Except voluminous academic research concludes this is a terrible investment category.
- tell the client that they can safely retire when they really can’t? That will make the client happy – until they run out of money later!
- make frequent changes to the portfolio? Overtrading leads to worse performance, but most clients (erroneously) take it as a sign the advisor is “doing something” for them.
- This last category really sets quality advisors apart. Does the advisor recommend things (strongly even) that actually cost them (the advisor) money? Many prudent actions can reduce the size of the portfolio, and thus the amount of fees or commissions an advisor will earn for managing that portfolio. Nonetheless, when appropriate, does the financial advisor:
- recommend delaying Social Security benefits? (Thus increasing portfolio withdrawals in the short run.) This is virtually always a prudent recommendation.
- recommend paying off (or down) the mortgage?
- recommend directing additional savings to the employer’s retirement plan rather than to the taxable portfolio managed by the advisor?