So When Do You Change Your Financial Advisor?

We recently spoke at a prospective client event in Santa Barbara, California and we were asked the question "how do you know when you should change financial advisors?"  Before answering that question, however, one must understand that the term "financial advisor" can take on many different definitions.  Most "retail" (individual) investors, who use a financial advisor in helping them with their planning and investments, do not deal directly with those who make actual day to day investment decisions.  By our definition, a "financial advisor" is generally NOT an "investment manager".  In todays financial services world, financial advisors usually invest primarily in mutual funds or pick a 3rd party "investment manager" (sometimes also referred to as an "asset manager"). An investment manager will make actual "investment decisions" which we define as picking individual companies to be put into the client portfolio (whether bonds, stocks or preferred stock, etc.).  By that definition, an investment manager is NOT someone who chooses third party asset managers (who DO make investment decisions) or picks mutual funds (also managed by a third party).  This distinction is important because investment managers will often also act as financial advisors to their clients (as does Taylor Frigon) by helping them with important planning decisions and so forth.

Those who have been long time readers of this blog, or are familiar with our philosophy, know that we believe it is preferable that investors get as close to those that are making actual investment decisions as possible.  This blog is full of other posts explaining why we believe that, but here are just a few examples:

Novemeber 15, 2007 "Don't hire a journalist to coach your team." :

"...would you want Vince Lombardi running your team or the guy who is up in the booth doing commentary? A reporter may know a lot about the game, but the experience of voicing opinions is vastly different than the experience of making the tough calls day-in and day-out."

January 23, 2008 : "A twenty-year perspective for the recent market turbulence":

"The lesson of the terrible long-term performance shown in the graph above is that the average investor (and the average advisor, according to our understanding of the data) is fairly capable at picking short-term performers, but does not have the consistency required to achieve long-term success."

January 28, 2008: "Can your advisor answer this question?"

"Can an advisor even tell you what the long-term rate of return experienced by his clients has been? He should be able to, but can he?

It is very easy to pull out a track record of a fund or a manager that his clients own right now, and show the twenty-year record ... of that particular fund or manager, but as we have pointed out before, the advisor's clients may very well have just entered that fund or portfolio and thus the history before that time does not reflect returns that the clients themselves experienced."

February 1, 2008  "When do you fire your investment manager?":

"We have long advocated finding a money manager who has a consistent investment process and has been using that investment process for a period of many years, and has an infrastructure around him, but who isn't too big. We believe that a manager's level of investment in his own portfolios is also an important indicator (he should "eat his own cooking")."