Is your adviser competent?

Kelly Rodgers, MoneySense December/January 2003

IF YOUR FINANCIAL ADVISER has sent you a statement that shows you've lost one heck of a lot of money in the past year, you've probably been tempted to pick up the phone and fire him on the spot. After all, advisers are supposed to make you money, not lose it.

Hold on a second, though. While poor returns are certainly a cause for concern, it's not always a good idea to dump your financial adviser because of a bad quarter or two. The past two years have been one of the worst bear markets of the past century. Just about every investor, financial adviser and fund manager has lost money.

What you have to determine is whether you've been the victim of a bad market or a bad adviser. I suggest asking three questions. If the answer is yes to any of these queries, then start dialing-it's time to look for a new adviser.

Is your adviser competent? It's not your adviser's fault that the stock market has plummeted over the past two years. However, it is your adviser's fault if he established your investment plan on the assumption that we would never experience a bear market. It's also your adviser's fault if he dismissed your concerns about risk. Either practice raises questions about your adviser's fundamental competence.

If at the height of the tech boom, your adviser decided that basic investing principles no longer applied and advised you to devote an alarming proportion of your savings to high-risk tech stocks, then you should be worried about his knowledge of elementary principles of portfolio planning and asset diversification. The same holds true if your adviser has demonstrated no consistency. If he initially assessed you as an aggressive investor and put most of your money in stocks, then suddenly decided that you should be a balanced investor, with your money divided equally between bonds and stocks, he's clearly baffled.

Has your adviser done the job he or she was hired to do? Your adviser's performance should be consistent with the investment style that he outlined to you when you signed on, If he follows a growth style, your portfolio should contain lots of stocks with strong earnings growth. On the other hand, if your adviser advocates a value style, you should be holding predominantly cheap stocks with steady earnings growth.

Growth managers have taken a bigger financial hit than value managers over the past two years because growth investments tend to be more vulnerable to economic setbacks. If your value manager has been trailing the pack over the past two years, you should be asking some tough questions. By the same logic, if your growth manager has been doing better than the market over the same period, you should also ask questions. While it may sound odd to fret over good performance, the reasoning is similar: your adviser is obviously deviating from the style that he initially sold you on.

What do I require for the future? Your adviser should already be discussing ways that you can deal with today's choppy, low-return market, One important issue is market volatility. In this investing climate, most of us would be happy to give up a bit of potential profit in exchange for safe, reliable returns. Your adviser should be able to sketch out strategies for smoothing out your returns. Some of those strategies may include hedge funds or income trusts, both of which are enjoying a spate of popularity. In either case, your adviser should clearly explain the hidden risks of these products.

Another important issue is fees. In the current low-return environment, it's vital to lower your investment costs. Smart advisers should explain how you can do this, perhaps by beefing up your exposure to low-cost balanced funds that invest in a blend of stocks and bonds.

You may find that your adviser has scored well on the first two questions but that you don't have a lot of confidence in his answers to this final query. Perhaps your adviser is looking backward; perhaps your needs have changed. First, sort out your needs. Then see if your adviser can meet them. If the answer is no, look for an adviser who can.