Updated: Jul 12
Transcript summarized below:
How do you know when it may be time to change financial advisors? Stick around and let's find out.
Hello and welcome to another video from One-Up Financial. I am your host Eric Presogna here to help you increase income, reduce taxes and invest smarter in retirement.
I meet with prospective clients on a weekly basis and rarely do I hear complaints of poor performance or lack of service from their financial advisor, especially now considering the secular bull market continues to push IRAs and 401(k)s higher and higher.
But as the saying goes, the devil is in the details. It isn't until several meetings and hours of analyzing financial statements for a prospective investor that I begin uncovering areas of opportunities they never knew existed.
Advances in technology have led to fee compression in the financial services industry which has, in-turn forced financial advisors to either reduce their fees or enhance their suite of services. But believe it or not, there are a number of advisors who've yet to adapt to this ever-changing landscape and continue to sell over-priced products, charge excessive fees and underserve their investors.
The sad part is most people who work with an advisor like this have no idea if they're being charged too much or if they're missing out on a valuable service. They simply don't know what they don't know and rely heavily on trust.
Don't get me wrong, trust is essential in all relationships and professional services is no exception. Where I see a problem is when that trust is abused, and I've unfortunately encountered too many instances of this throughout my career.
And that's the basis for this video: to protect investors from being taken advantage of and paying too much for too little. Here are 5 warning signs that it might be time to start shopping for a new advisor:
1. Excessive Fees
The average fee a FIDUCIARY charges for ongoing financial advice is around 1% of assets. In other words, that's $30,000 a year to manage a 3 million dollar portfolio. Is that considered excessive you may ask? It really depends on the value you're receiving for that fee.
Example: I met with a retiree who had money all over the place. In looking at his tax return, I noticed he had investments at a local brokerage firm who will remain nameless. His money was invested in an actively managed mutual fund charging 1.5%. The fund had exhibited poor performance over the past 10 years and this individual hadn't met with anyone from that firm in years.
On top of that, the fund kicked off over $20,000 in capital gains which equated to $2,000 in additional taxes. So really, he was paying closer to 2% in fees if you include taxes for no service whatsoever, no value-added, mediocre performance and twice the average annual fee. That's not excessive, that's straight stealing!
Take-away: Know what you're paying in management fees, including those paid to your advisor and the funds he/she is investing in. If it's a large amount (on a $ or % basis) and all you're getting in return is 2 one-hour meetings each year and sub-par performance, it may be time to reassess your relationship with that advisor and start shopping.
2. Portfolio Dormancy
When's the last time you really looked at your investment statement? If you're like some, you glance at it briefly, make sure the balance is going up rather than down and toss it in the trash. I get it, they can be lengthy and confusing.
Next time you look at your statement or better yet meet with your advisor, check to see how many trades were made in the past 6-12 months. The reality is some of the big financial institutions tend to spend more time and resources on larger, more profitably accounts than the smaller ones. And in the wealth management business, smaller can be defined as less than $3 million.
This results in portfolio dormancy, or lack of attention being paid towards rebalancing, tax-loss harvesting and other portfolio trading strategies administered on an ongoing and consistent basis.
That doesn't mean more trading activity means more service. Too much buying and selling can actually be detrimental to long-term performance.
Take-away: What you really want to understand and see is your advisor is putting in the time. Rebalancing should be done at least twice a year (Schwab recommends more) on top of tax-loss harvesting positions in taxable accounts, both of which will yield trading activity which you'll see on your investment statement.
3. Lack of a Financial Plan
I honestly don't know how it's possible to have investments in place without a financial plan. That's like taking a long road trip with your family and neglecting to bring a map or GPS.
Your investments are merely one piece of a much larger financial puzzle. When do you want to retire? What does retirement look like for you? How much can you afford to spend? How much do you need to save? Do you need to take more/less risk in the market? What are you paying in taxes each year? These are just some of the critical questions that should be addressed during the construction of a comprehensive financial plan as each will have an impact on how your money should be managed. And all too often, I get blank stares from prospective clients when asking these questions which leads me to believe they don't have a plan in place.
Take-away: Understand what's driving your investment strategy. Having a clearly defined financial plan that you understand, and one that your advisor reviews with you and updates at least annually will help guide how your investments should be structured. You can't have one without the other.
4. Decline in Meetings and Phone Calls
Getting back to my earlier example of the retiree paying 2% for absolutely nothing, be cognizant of how often your advisor calls and meets with you. In the beginning, you may receive a lot of attention in the form of in-person meetings, dinners, wine-tastings and other client appreciation events. This is a common way advisors attempt to win your business and nurture your relationship.
Over time, however that attention may start to fade as complacency sets in and what was once three in-person meetings a year turns into an annual review over the phone and a birthday card.
Take-away: Financial advice is a service-based business and service is exactly what you should be receiving, especially if you're paying tens of thousands of dollars each year. Be sure you're getting the attention you and your portfolio deserve.
5. Larger Than Expected Tax Bill
I remember it like it was yesterday. The individual I met with was surprised his usual tax refund had turned into a hefty tax bill. Upon closer review of his tax return, I found he recently started taking RMDs from his IRA which, on top of his social security bumped him up a bit in taxable income. What made things worse was the $40,000 in capital gain distributions from the mutual funds held in his taxable investment account.
Clearly, his advisor didn't consider the impact of holding a high-turnover mutual fund in a brokerage account which led to a more than a $6,000 increase in taxes.
Take-away: It isn't enough to just be adept at picking funds or advising on stocks. Wealth management involves much more than managing investments. Be sure your advisor is competent, credentialed and knows his or her way around the tax code or else be prepared for an unwelcome surprise come tax time.
These warning signs may not always be easy to spot at first glance. If after a more careful review of your financial advisor relationship you begin to notice some or all of the items discussed, please don't hesitate to call or email me for a second opinion.
Thanks as always for tuning in to watch our videos. If you're interested in staying up to date with our market and financial commentary please subscribe to our blog at oneupfinancial.com/blog or follow us on LinkedIn and Facebook. Thanks again and we'll see ya in the next one.