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INVESTING: Quarterly Review & Outlook

Assessing Value of the Advice and the Advisor

A financial planner or broker should be judged on more than just a portfolio's performance.


It's been a tough 12 months to be managing someone else's money.

But for financial advisors and their clients, the dramatic year that just passed in the markets also may be the most important test of whether the relationship can last.

"When the market is going up, everybody looks good," said Michael Andreola, tax partner at BDO Seidman in New York. Now, he said, investors have had a chance to measure the talents of their financial planner, broker or other advisor against the toughest stock market in more than a decade.

Yet investment return--in good or bad markets--is just one aspect of sound financial advice, experts say.

Has your financial advisor earned his or her fees during the last year? These questions can help you objectively answer that:

1. Were you prepared?

Good financial advisors go over the potential risks and rewards of various investments before customers put their money on the line. That means whatever losses you suffered in the last year should have been in a range you expected.

"Examine the surprise factor," said Chuck Jaffe, author of "The Right Way to Hire Financial Help" (MIT Press, 2001). "You should not be surprised by something happening in your portfolio."

There are nuances to investing that your advisor should understand and, more important, explain to you. For example, mutual funds and individual portfolios invested largely in one segment of the market, such as technology or financial services, tend to be more volatile than funds that spread their investments more evenly among a variety of industry groups.

Advisors who thoroughly explain investment risks to clients minimize the potential for those clients to become overly emotional about market swings, Jaffe said. And controlling fear is a key element in being able to stay the course with a portfolio.

2. Was your portfolio diversified before the market sank?

Savvy financial advisors make sure their clients are well-diversified--both in terms of asset classes and individual investments.

What that means is that most people should have some money in stocks, some in bonds and some in short-term cash accounts--the three basic asset classes. But that's just step one.

Step two is making sure that the stock portion of the portfolio, for example, includes a variety of mutual funds and/or individual stocks.

An advisor who isn't paying attention can fill a client's portfolio with mutual funds that are heavily invested in the same narrow area--tech stocks, for example--even though the funds might appear on the surface to be broadly diversified. That can leave the portfolio vulnerable if that particular segment of the market takes a hit.

Proper diversification is a tough sell when one segment of the market is red-hot. But good advisors keep clients focused on the long-term merits of diversification.

3. Have your investments matched your ability to tolerate risk?

Investors often tell financial advisors that they want to earn a target rate of return on their money each year--say, 10% or 12%, said James Shambo, a certified public accountant and personal finance specialist with Lifetime Planning Concepts in Colorado Springs, Colo.

But clients frequently don't understand the risks they might have to tolerate to generate their desired return, he said. They also might not realize that, to reach their financial goals, they might not need a particularly high return and its attendant risk.

An advisor's job is to work with the client to determine what the client's goals will cost and how best to achieve those goals, Shambo said.

"If you get people to be realistic upfront, you are much more likely to strike a reasonable balance," Shambo said. "We figure that your investments have to provide a total picture that lets you both sleep well and eat well."

4. Has your advisor created a long-term plan?

Besides helping you pick investments, an advisor ought to suggest a savings and investment regimen aimed at achieving your long-term goals.

It's a good sign if an advisor got you started on a regular savings pattern--and can tell you how much progress you've made, experts say.

It's a bad sign if the planner simply wants to help you invest money that you've already accumulated, without a plan for investing future savings, dealing with estate issues, etc.

5. Have you followed the plan your advisor laid out?

In the context of your portfolio's performance during the last year, also ask yourself this question: Did your advisor give poor advice--or did you fail to follow good advice you were given?

You can have a personal trainer, but it will do little good if you continue to consume large quantities of doughnuts. Investing is much the same: You have to follow through on a plan.

6. Do you own products or a portfolio?

There's no reason to own more than two mutual funds in a single market niche, Jaffe said. If your portfolio has numerous "copycat" funds, an advisor should have an adequate answer as to why similar funds are necessary to meet your long-term goals.

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