Summary: A new book recommends evaluating financial advisors based on performance, philosophy, process, people and fees. Consider your own biases and try to work through any issues with an advisor. Firing a competent advisor without looking carefully at the situation could be as costly as hiring a bad advisor.
Key take-out: Do some soul searching and consider your expectations before firing a financial advisor who seems unsatisfactory.
Key beneficiaries: General investors. Category: Strategy.
Knowing when it’s prudent to fire your wealth manager is just as important as picking the right one in the first place. Author Charlotte Beyer walks us through the painful process in her book Wealth Management Unwrapped. The key takeaway: Before bouncing a seemingly unsatisfactory financial advisor, do some soul searching. Sometimes the biggest issue in your relationship could be your expectations.
Beyer knows the tribulations of picking a private banker all too well. She spent 20 years on Wall Street before founding in 1999 the Institute for Private Investors, a peer-to-peer membership organisation for high-net worth types. Recently retired, Beyer leveraged that intimate knowledge and wrote a bite-sized treatise, just 86 pages, on finding the right private banker, from courtship to ultimately ending the relationship. (Barron’s recommended the book in recent review, “How to Choose a Financial Advisor.”)
There are specific times when a high-net worth type needs to reevaluate their advisor, Beyer concedes. If there is a big change at your current firm, for instance, like a merger, significant acquisition, or a management shakeup. But be patient, she writes, because if a trusted advisor is staying on, take a deep breath and remember why you selected the advisor in the first place.
Beyer advises folks to evaluate their wealth managers based on her “five Ps”: “performance,” meaning, how have they done?; “philosophy,” their investing style and interaction with clients; “process,” how decisions are made in the firm; “people,” who they are; and lastly, the goofily labelled, “phees.” Each “P” gets a score from 0 to 10. If the firm scores highly on each then stick around. If the firm doesn’t make the grade, it’s time to jump ship. Beyer doesn’t tell us what she thinks is an acceptable score; every person draws their line at a different spot.
She also recommends revisiting your notes when you first selected your wealth manager. It’s likely to reveal a few of your own predisposed biases to one of Beyer’s “Ps,” either performance, philosophy, process, people, or fees. Beyer suggests honestly allocating a percentage of 100%, based on their importance to you, to each of her five Ps. You might allocate 80% to performance and care very little about people or philosophy.
“Be wary if your percentages aren’t evenly distributed,” she warns, because it might blind you during the evaluation process. That danger is laid out in the opening page of Beyer’s book, in which IPI members debate the “fantastic” returns of Bernie Madoff. Performance alone cannot be king. Knowing that performance is so important, might force you to scrutinize the other Ps for something you’ve missed. In the Madoff case, many were enamoured by the “performance,” but neglected the “people” part of the evaluation, creating the illusory returns.
Like in a marriage, sticking with your advisor and sorting through your issues can often be the best option. Beyer recalls an agitated IPI member who was close to sacking their wealth manager because of poor performance during the financial crisis. Instead of firing the advisor outright, however, the investor smartly orchestrated a beauty contest, in which the advisor was made to pitch alongside other firms. The winner would get the client’s assets.
The IPI member ended up staying with their current wealth manager. His returns were better than many endowments, pension funds and other sophisticated portfolios were producing during the financial crisis. The problem was really a communication issue, in which the wonky advisor didn’t properly provide the context to the client’s portfolio returns. The revelation prompted the advisor to refine his reports, reassuring the client he was doing very well under the circumstances.
The advisor/client relationship is really a 50/50 partnership, Beyer notes, so take a step back before firing a wealth manager, especially in a bear market. She claims that many clients drop their advisor just before the inevitable comeback. The aforementioned client, who stuck with their wealth manager, captured the bull market of 2009 to 2013 by not being spooked by what he initially perceived as terrible returns.
An important lesson: Firing a competent wealth advisor, because you haven’t looked honestly at the facts, could be as costly a mistake as hiring a bad advisor in the first place.
This article has been reproduced with permission from Barron’s.