You may get a wake-up call when you review your 2015 investment performance numbers. You may even conclude that your financial adviser is not the investment genius you thought he or she was.
That’s because you may have given your adviser credit for the fine performance of your investments during bull markets.
Six years of positive returns came to a halt in 2015, however, when the stock market produced its first negative return since 2008. The S&P 500, a proxy for the performance of the stock market, was down a nominal 0.7 percent. This small loss includes dividends, but does not reflect the deduction of any investment expenses.
Some advisers disappear when markets fall. They don’t want to take the heat when they create high expectations and fail to perform.
That nominal loss is not a big deal by itself. But deduct typical expenses from the S&P 500 return and the net return could have been a negative 2 percent or 3 percent.
Time to Find a New Adviser?
If your assets declined 5 percent (or even 10 percent) after all expenses have been deducted and you expected to match or beat the performance of the market by losing less or making more than the average, now that is a very big deal.
In that case, you paid substantial fees for inferior results and your adviser could have made more money from assets than you did.
To see whether it might be time to find a new investment adviser, here are three basic questions you have to answer:
- What was your performance net of expenses in 2015?
- Did this performance meet your expectations?
- Did your adviser create the expectations?
The answer to the first question should have a major impact on your answer to the other two.
4 Key Areas to Monitor
Here are a few more questions in four key areas to help you decide whether to keep your adviser in 2016:
Performance Did your adviser use a beat-the-market strategy to justify higher expenses and then fail to deliver superior performance? Did your adviser use a lower-cost match the market strategy? If so, did the results match the benchmarks that represent the market?
Expenses How much did you pay for your performance? Was the expense greater than your rate of return?
If you don’t know all the expenses that were deducted from your assets in 2015, ask your pro for complete documentation. Terminate any adviser who withholds this information.
Risk Were you rewarded for the amount of risk you were exposed to in 2015? For example, if your assets were 100 percent invested in the stock market, did you outperform the S&P 500 net of all expenses?
You were rewarded for your risk exposure if your return exceeded the S&P 500’s return. You were not rewarded for risk if your return lagged the performance of the index — in this case, by losing more.
Service Did your adviser’s reports and meetings meet your expectations?
Some advisers disappear when markets fall. They don’t want to take the heat when they create high expectations and then fail to perform.
If you didn’t receive performance reports documenting your 2015 results, there is a good chance your adviser is a sales rep who does not provide this basic service.
Getting Essential Facts and Information
Ultimately, it comes down to this: Did you get the facts you needed to make informed decisions? And is your adviser providing the information you are seeking?
If the answer to these two questions is no, terminate this relationship. Withholding information is a breach of an adviser’s fiduciary responsibility to always act in your best interest.