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November 3, 2011

How do You Rate Your Advisor?

An "A" may be asking too much - but you shouldn't settle for mediocre or worse.

You did your homework. You used an objective approach. You considered your advisor’s experience, compliance record, fee structure, and certifications before making your decision. The firm held up to your due diligence, so you took the big step and placed your hard-earned assets with your new advisor to manage. Now what? How do you rate their work?

As a client of a wealth manager, you have several ways to evaluate them. Do they seem to care about me? Do they understand my situation? Have they invested my assets appropriately? Are they responsive to my needs and questions? Do they communicate effectively? Yes, yes, yes. You’re still satisfied, and you’re confident in the choice you made. Then there’s performance. Oh yeah…that. But how should you evaluate a wealth manager’s performance during a lost decade for stocks?

Here are some thoughts. Since our boom and bust markets and lots of economic turmoil make it difficult to provide consistently good returns, you shouldn’t expect your advisor to outperform. Or should you? It’s true the S&P 500 was flat-to-down for much of the last ten years – but there were bright spots along the way. And other assets performed quite well during the same period, such as Treasurys and gold.

What separates good wealth managers from the also-rans is their ability to understand and adapt their portfolios to the stormy dynamics of today’s markets. On the other hand, managers who lock in to a static investment approach have had a harder time of it lately. These guidelines can help you decide whether your wealth manager makes the grade.

Getting an A

You should give your advisor an A for outstanding performance over the past 3-5 years if they were able to properly understand central bank activities and interpret the effects on the money supply. Since 2008, the Fed has taken unprecedented measures to shore up the US economy by pushing interest rates to historic lows and using bond markets to print dollars. The effect has been a declining Dollar and successive new highs in Treasurys and in gold. The excellent portfolio manager understood these movements and captured them. Meanwhile, stocks slumped, with the S&P 500 declining 12% and posting losses for 28 out of those 60 months, so an outstanding manager prudently limited or avoided exposure to large cap stocks when it mattered. Since March of 2009, however, risk assets roared back. The prescient advisor who captured the gains in the S&P 500 and the Dow Jones US Real Estate Index would have garnered returns of 60% and 138% respectively. Did your wealth manager perform so acrobatically? Most did not.

Getting a D or F

Let’s consider the other extreme, absurd as it is. You should give your advisor a D if they tried the acrobatics described above and fell off the high wire. They misread the environment and got it exactly wrong. Perhaps they doubled down on risk assets when they should have moved to T-Bills. Maybe they went to cash just as the tide turned in 2009 and stocks began a 74% percent advance off their lows. You should give your advisor an F if they bought high, bought more high, sold low, waited; and then bought back high again. The people at Schleprock Advisors deserve a failing grade for vaporizing your shares when just staying invested would have kept you out of the soup line.

Getting a C

Working our way up, you should give your advisor a C if they understood your needs and invested your assets appropriately, but kept your portfolio mostly static for the past 5 years. After using care and prudence to design the proper asset allocation for you and avoid being over-exposed to risk, they got that deer-in-the-headlights look during the economic meltdown. Maybe they didn’t know what to do next, so they just froze. “Set it and forget it” may work for the rotisserie you bought on the Shopping Channel, but it’s not a prudent approach for your life savings.

Getting a B

You should give your advisor a B if they’re somewhere between the “A” performance of the economic athlete and the “C” performance of the static manager. Your wealth manager is above-average if they have attended to your investment needs and done a reasonably good job of responding to changes in the economy and markets. They got some things right, like becoming defensive at the right time. Maybe they waited too long to act once or twice, but they correctly understood the trends and made prudent adjustments. Their actions boosted your bottom line by shifting toward protection or growth in a timely way.

Finding a Grade A advisor is most desirable; but few managers can execute so well repeatedly. While you clearly should avoid the bottom tier, you also needn’t settle for mediocre results of the average, static advisor. During these trying economic times, you may not be accustomed or pleased to getting lower returns than in the past. But you should have confidence if your advisor is smart and responsive in their management technique, and qualifies for an above-average grade. Such a wealth manager will probably serve you well.


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