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Is It Time to Fire Your Advisor?

Friday, October 16, 2009

The financial services industry takes a substantial amount of criticism (much of it undeservingly) from many directions. The vast majority of our industry is made up serious financial advisors with their clients best interests at heart. These are the same advisors I see at conferences and seminars where we pay our way to learn as we are in a complex and changing information based business.

In the autumn of 2008, the investing world was mostly caught unaware as the U.S led mortgage and credit crisis spread around the world, almost crippling our entire financial system. It took a massive effort by governments around the world to avert this crisis. As we all know now, every major world stock market tumbled rapidly by about 35-50%.

What really disappointed me was when I watched TV or went to the gym and heard stories about seniors whose RRSP/investment portfolios were down by 50%.I was(and still am) quite shocked by this. I said to the gentlemen in the gym that the only way to be down 50% is to be fully invested in equities. There are occasions where that type of aggressive portfolio might be inline with the client’s risk tolerance/goals. Perhaps the client (and his partner) has very good municipal/federal pensions and this is “fun money”. They told their advisor that they have very comfortable pensions, the home is paid off and they wish to be more aggressive with this money. The gentlemen in the gym assured me that this wasn’t the case. I said in that case your advisor should be fired.

The big worry for clients is when to make the change. They have just lost 40-50% and changing advisors isn’t without risk either. The time to change is now when markets have staged a pretty decent recovery. Your advisor (who lost 40-50%) shouldn’t be “forgiven” for his/her error. Losing 50% means you need to make 100% to get back to where you already were. We don’t work hard to save our money, invest it over years just to break even. You could do better investing in GIC”s.You don’t need a financial advisor for this. You could lose 50% on your own. If you’re paying for advice, make sure it’s decent to good advice you’re receiving. You can get bad advice from your friends and neighbors. A professional financial advisor must be held to a higher standard that your friend/neighbor.

Ask a few friends and neighbors who they invest with. Are they happy? Why are they happy with the advisor? Sit down with the prospective new advisor(s) and look at his proposal. Do you understand the investments? Make sure that it contains fixed income so you don’t make the same mistake again. Mistakes of that magnitude can take 5 years or more to recover from and if you’re a senior, you might not have the time or the stress tolerance to go through that type of loss again. Most seniors should have between 25-75% fixed income to protect the principal while it is being used to support your lifestyle in retirement. The fixed income content may be on the lower end if you have a great pension, your home is paid off and you can take the volatility of the markets. If this latest downturn gave you stress, caused you to think about working another year (or more) to ensure your retirement income requirements, or you don’t have a great pension other than this investment, you need to be on higher end of the fixed income spectrum.

Going forward, if you decide on a portfolio that is weighted 50/50 and the markets continue advancing where over time the fixed component becomes 35%, make sure the portfolio is re-balanced. Some portfolio mutual funds do this automatically within certain ranges and other investments require buys and sells to accomplish this objective. Investment portfolios are not stagnant vehicles. They need to be reworked after/during large corrections or movements up to make sure they are still in the range that is comfortable for the client.

Make your advisor accountable.



Generic Mutual Fund Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated.

Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.