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Commentary: This is a great time to take a hard look at your financial adviser

By Bob Clark
Last update: 6:28 p.m. EST Nov. 18, 2008

SANTA FE, N.M. (MarketWatch) — A silver lining of the recent Wall Street/economic meltdown is a chance to assess your relationship with your financial adviser. Sure, you could do this anytime, but the best indication of whether you’re getting what you need is when you need it most.

Chances are this is probably one of those times. This is so true, in fact, that the best financial advisers get the majority of their new clients during times like these — folks who have become dissatisfied with their old advisers. In most of these cases, the need to make a change is obvious. To paraphrase an old saying: If you have to ask, you probably need a new adviser.

What if you’re just not sure? Most people like their adviser — it’s usually one of the main reasons why he or she is your adviser. So you’re inclined to give them the benefit of the doubt, especially during tough times when their business is undoubtedly hurting as much or more than your portfolio.

But we are talking about your financial future here. You really can’t afford to stick with any professional who isn’t getting the job done. This is one of those rare times when it really is all about you.

The problem that most people have with evaluating their financial adviser is they don’t have much experience with other advisers. How do they know whether their service is good or bad? Compared to what? Sure, if you’re really unhappy, the decision is clear. But what if you’re just mildly annoyed?

One excellent independent adviser I know won’t even take new clients who haven’t had at least a couple of other advisers first — he doesn’t feel they can fully appreciate his level of service and expertise if they don’t have other experiences to compare.

Ultimately, only you can make the call whether it’s time to look for another financial adviser. But it can help to get some sense of what good advisers do. For some perspective, here are some important issues in an adviser/client relationship, together with how they best handle them:

Client communication. During this turbulent market (which really began last winter), how has the communication from your adviser been? Have you heard from him or her enough? Have all your questions and concerns been addressed?

Everyone has a different optimum communication level. Some people like a lot of handholding; others prefer not to be bothered unless absolutely necessary. But it’s safe to say that most everybody experiences a greater need to hear from their adviser during economic upheavals.

The best advisers have various methods of assessing just how much communication each client needs. And they have systems in place to meet those needs, without overloading themselves and their staffs. In fact, great advisers often survey their clients during tough times to make sure their needs are being met.

So, if you feel the need to hear from your adviser more often, or you’re just not getting the information or answers you’re looking for, be sure to let them know. And if the problem still doesn’t get solved, you might be happier with a different relationship.

Portfolio performance. Evaluating investment returns is always a tricky business. Just because a portfolio goes down doesn’t mean your adviser is incompetent, or that your portfolio was inappropriate.

All markets go up and down: stocks, bonds, real estate, gold, pork bellies, and even exchange-traded funds. If they didn’t, we’d all be rich.

But they will go back up — eventually. How long that takes is different for each market. Of course, no one really knows (although there are plenty of folks who will lead you to believe they do).

The best advisers take great pains to be sure their clients fully understand this and are prepared for it. These advisers rarely get worried client calls when markets go down, because their clients know that they have a long enough time horizon for their portfolios to go up again.

In the business, this is called “managing expectations” and if you were unaware that your portfolio would sooner or later shrink as much as it did, and were panicked when it did, you might want to consider another adviser.

Viable solutions. Sure your portfolio is down; so is everyone else’s. The question is: What do you do about it?

As I said, good advisers prepare their clients for market downturns, and allow for enough time in their financial plans for them to recover. If your time horizon is shorter than that, they advise you to put all or some of your money in bonds or even cash.

So, the right answer to “what do you do now?” is simply: Nothing. Or at least, nothing different than you were doing before, because you planned for this, or something like it, to happen sooner or later.

If, on the other hand, you’re advised to move your money into other investment products now — different stocks or bonds, mutual funds, ETFs, or annuities — beware. This is not a good time to be liquidating your portfolio. Unless you have suddenly become so financially strapped that you just need to sell your portfolio for whatever you can get, this is no time to be bailing out. Your adviser should know this.

If you’re being advised to sell or switch investments, you need to ask two questions: “Why?” and “What’s in it for them?”

Advisers who are paid sales commissions have a financial stake in selling new products that pay new commissions. When revenues are down, some succumb to the temptation to put their own interests ahead of yours. The best advisers charge only fees, so their income goes down when your portfolio goes down, and rises when your portfolio grows. That way, they’re always on your side.