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Tips on How to Assess the Work of Your Financial Advisor

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In most aspects of your life, it is easier to set expectations and judge whether something has been successful or not. For example, you can check if your mechanic has done a fine job by examining the repairs. However, evaluating the performance of a financial advisor is not as easy or straightforward. In financial advisory relationships, it can be difficult to ascertain if your advisor has been successful at their job unless you specifically know what factors to examine. Hence, it is important to articulate your expectations and establish a framework for monitoring, evaluating, and holding a financial advisor accountable for performance over time. Moreover, it is advisable to take this step early in the relationship and also, schedule timely reviews to ensure you are moving ahead in the right direction towards your financial goals.

Here are a few tips that can help you assess the work of your financial advisor:

  1. Analyze if the advisor’s financial planning services are adequate and aligned to your needs:
  2. Here are a few questions you can ask yourself when assessing the financial planning services of your advisor:

    • Are you being equipped with the right information to make appropriate financial decisions? Are you comfortable asking your advisor for the information, or do you feel that your financial advisor does not pay heed to your requests and inquiries?
    • Do you believe your advisor is trustworthy and acting in your best interests at all times?
    • How is your financial advisor improving returns on your investment portfolio? Are they aligning the investment choices with your risk tolerance, preferences, life stage, monetary goals, etc.?
    • Is your portfolio diversified enough to handle market volatility?
    • Does your portfolio aim for returns keeping in mind your retirement needs and your broader financial objective?
    • Is your financial advisor open and transparent about the fees involved? Do you know how your advisor or their firm earn money or charge for their services? Do you understand their pricing model? Are you in agreement with their rationale?
    • Are you sure you are not paying any hidden charges or have stumbled upon an event where you did not agree with your advisor’s fees?

    Overall, a good financial advisor will make you feel comfortable and openly answer all your questions. The professional would use their acumen to provide you with sound financial advice, enabling you to make informed decisions. An efficient advisor will keep your trust, and also aim to act in your best interest at all times. For this purpose, you can consider contracting with a fiduciary advisor. These financial advisors are governed by a fiduciary duty, which implies that they are obligated by law to keep your interest above theirs. Further, a competent advisor will understand your preferences, life stage, risk appetite, financial goals and more, and accordingly create a portfolio that best meets all aspects. It is important that your portfolio can withstand market volatility and also offers adequate returns. If you are not confident of your portfolio, you might want to reconsider your financial advisor. More so, if you feel the professional is charging any hidden fees, or selling you financial products for their benefit, you can think of selecting a more reliable advisor. It helps to be upfront and speak to your advisor about how they earn money and what pricing model they work on. If you agree with your advisor, you can continue using their services. If not, you can hire somebody else.

  3. Evaluate the performance of your investments, stability of your portfolio, and the investment guidance you receive:
  4. Another aspect you can use to understand the work of your financial advisor is to take stock of the following:

    • Does your financial advisor monitor the returns and risk of your investments? How does the advisor undertake this exercise?
    • How often does your advisor monitor and report the updates on your investment portfolio?
    • Does your financial advisor give you investment updates daily, weekly, monthly, annually, or only when you ask them to do so?
    • Does your advisor meet you in-person to explain investment decisions and returns?
    • Is your financial advisor well-informed about the market and is agile to adapt to market trends?
    • Does your advisor take panic-based decisions as per the daily movements in the market, or do they take a long-term view and make informed decisions?
    • How honest and transparent is your financial advisor when it comes to sharing portfolio information, whether positive or negative?
    • Are you in line with achieving your financial goals? Has your net worth improved since you engaged with the financial advisor?

    Ideally, your advisor should consistently monitor the returns and risks of your investments as well as apprise you of the details at a pre-agreed frequency. You can choose to get these updates daily, weekly, monthly, semi-annually, or annually, as per your preference. If the professional fails to provide you updates as per the agreed frequency, you can confront them about it or end the contract and engage with a new advisor. Moreover, it is beneficial to hire a financial advisor who adopts a long-term view rather than a short-term perspective.

    Panic-based decisions often do not work in your favor instead they tend to deviate from your original financial plan. The objective is to reduce your liabilities and taxes, increase income, and improve your net worth, and a financial advisor who is not adequately meeting these goals might not be the right fit for you.

  5. Assess if your financial needs and vision are understood and prioritized:
  6. When you engage with a financial advisor, you are giving them the responsibility of your financial security and future. However, even though they assume the responsibility, the risk is yours. You are putting your future finances and hard-earned money at stake. Hence, your financial returns and goals are parameters that matter the most. If you feel your financial advisor is not taking your needs seriously or has not taken proper measures to place your needs or vision first, you might want to reconsider your engagement.

    Trust and transparency are the two most critical pillars of the relationship between you and your financial advisor. Your advisor should work with you to improve your monetary situation and financially secure your future. If you are not convinced that your advisor is working along these lines, you might want to have an open discussion with the professional or think of alternatives, if needed.

  7. Statistically benchmark your investment performance, and check if your monetary situation has improved:
  8. Apart from the several questions you can ask yourself about the openness of communication and transparency of pricing, you need to set objective quantifiable metrics to assess the work of your financial advisor. Your advisor and you should agree on a long-term objective, consistent with your goals and constraints, and the expectations against market returns. However, when assessing your portfolio strictly on absolute returns you should also consider the fact that broad market fluctuations have a significant impact on performance, especially over shorter periods. Moreover, since these fluctuations are highly volatile and extremely hard to predict, it is not right to solely credit or blame your advisor for the market movements. Therefore, it is advisable to measure your investment performance against a custom benchmark index that closely mimics your investment mix. Your custom index should be actionable and measurable. You can use a simple, well-diversified DIY (do it yourself) portfolio as a suitable benchmark to assess whether your financial advisor is adding adequate value. Further, evaluate if the value addition is justifying the fee your advisor charges.

    However, it is wiser to not adopt a strict benchmark-hugging approach, as the more a portfolio looks like an index, the more difficult it becomes to outperform it. Moreover, specific indices like the MSCI All Country World index have restricted exposure to niche market segments that can otherwise be valuable additions to your investment portfolio. Hence, the idea is to have objective benchmarks while simultaneously recognizing and adjusting their limitations. You can take a quarterly review of your portfolio performance against the custom index. In case of a deviation, you can discuss the results with your financial advisor to know the reasons as well as evaluate the performance. Some questions you can ask your financial advisor are:

    • Why did we diverge from the benchmark?
    • Is this deviation normal or is there a fault in the investment strategy?
    • Are we including a lot of risky securities in my portfolio to get higher returns?
    • What is the role of the advisor’s fee in the portfolio returns?
    • Is there a more economical way to get exposure to specific investment securities?

  9. Analyze the trade-off between the cost of your financial advisor and returns generated:
  10. Your financial advisor works for you for a price. Whether your advisor adopts a fee-only method or a fee-based method, you are paying a specific amount of your hard-earned money. Hence, it is only wise for you to assess whether the fee you are paying the advisor is a worthwhile investment or not. The objective is to not compare your absolute cost with absolute returns. Instead, you can determine if the overall money you are paying is competitive. It would not be advisable to expect the lowest cost possible. But it is also not smart to pay charges that are significantly higher than other advisors. You can ask your financial advisor to give you a benchmark cost, which you can further run through with your friends, family, or do a quick internet search and compare with the industry standards. However, you must remember that there is a trade-off between the cost you pay and the service or quality you get. Therefore, when judging your financial advisor based on cost, be sure to take a holistic view and include investment charges, commissions, transaction fees, etc.

  11. Understand your advisor’s proactiveness and general outlook:
  12. Markets are volatile. Sometimes, volatility can surpass set levels to create anxiety among investors. In such situations of economic unpredictability, it is beneficial to have an advisor who can help you navigate the tough situation. You can assess their work by analyzing if your financial advisor is still equipped to offer sound advice, despite any recent changes in laws or market dynamics. Further, find out if the advisor has kept you up-to-date on their thoughts and market perspective. Can the advisor assure you of the security of your portfolio? How will the recent market movement impact your goals? Are you still on track or not? If not, what should be done differently with your savings, investments, taxes, etc., to get back on track?

    If your advisor is making sudden, unexpected changes in your investment holdings, they might not be confident about their prior advice or the fact that your portfolio is properly positioned to withstand extreme volatility. This will help you determine how efficient your relationship with your advisor has been. It may not be recommended to engage with an advisor who is unable to form a cohesive and effective investment strategy for the times ahead. Moreover, an advisor who is not proactive to communicate vital information through emails and calls, or someone who does not respond to your queries on the market situation may not be an ideal choice. The objective is to choose a professional that can help you through market volatility and add stability to your portfolio.

  13. Evaluate the process of the financial advisor rather than just the outcomes:
  14. As a thoughtful investor, you must realize the uncertainty and unpredictability of the market. If a specific outcome was not achieved, it does not imply that your financial advisor was wrong to have considered the possibility to take risk. It is advisable to not judge your advisor solely on the outcomes, instead take a comprehensive tally of their decisions and the logic governing them. The objective is to focus on the advisor’s process rather than only the outcome. For this purpose, you can understand how the advisor aims to add value and have clear communication with the decisions made and the rationale behind those decisions. There is no defined strategy, advisor, or investment program that can succeed in all environments. At some point, all portfolios experience a period of poor results, relative or absolute. However, you can evaluate your advisor in such times based on their decisions at the inflection point. The motto is to not completely ignore the numbers when assessing the work of your financial advisor, but give them some credit for their process and rationale if they stumble.

To sum it up

There is no fixed standard or a defined way to assess your financial advisor just like there is no set method to judge a teacher, a doctor, etc. The most important thing for you to do is to set expectations early and hold clear communications regarding your goals, performance evaluation metrics, the period of evaluation, and more. Moreover, it is good to take a holistic view of the advisor’s performance rather than confine it only to numbers. If you need some professional guidance you can use our free tool to compare up to 3 financial advisors to find the best advisor for your needs. You should be able to trust a professional financial advisor to offer you sincere advice, assuring your future financial security.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.