Do You and Your Financial Adviser Belong Together?

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Group of business people hiding their faces behind a question mark sign at office
By Joanne Cleaver

You play golf with your financial adviser. You get invitations to attend concerts as his guest. Your sister's husband thinks he's a great guy. And he may be. But that doesn't make him the best financial adviser for you.

Assuming you don't suspect fraud, and your adviser's performance is at least respectable, you still may have vague feelings that someone else could better help you. Translate your hunch into insight by considering these red flags.

1. You Feel Guilty Looking Elsewhere for Advice

Congratulations: That free lunch was served with a side of guilt. There's a good reason advisers are constantly trying to be your pal: The classic mode of building a practice is through building relationships, says Dr. Ted Klontz, founder of Klontz Counsulting in Nashville, Tennessee. He is a psychologist who helps financial advisers better work with clients. But "relationship marketing" can feel too close for comfort, especially if you feel trapped because your social and business circles overlap with the adviser's circles. "You're afraid of rejecting someone," he says.

Clarify the situation by separating the social discussions from the client-adviser discussions, Klontz says. The most important litmus test is whether the adviser is helping you move toward your goals, he says. "If you're not moving towards your goals, they're not really your goals," he says. "Once a goal truly becomes yours, nothing will stop you." If you find yourself consistently diverting from the agreed-on financial plan, or you aren't seeing how all of your financial decisions and your career situation are helping you make progress, maybe you haven't really stated your true goals.

If so, the fault may partly lie with your adviser for not asking the right questions, and that's a bigger concern than getting a few free rounds of golf. Klontz had this realization himself when he kept telling his adviser he wanted to retire by a certain age, but somehow he never got around to saving the required amount. Finally, Klontz says, he realized he didn't actually want to retire. What he really wanted was to do more of what he wanted, when and how he wanted. With that light bulb clicked on, he started saving three times more than he had before.

2. Your Adviser if More Psyched About Your Goals Than You Are

In a research paper, "Aspects of Investor Psychology," professors Daniel Kahneman of the Woodrow Wilson School of Public and International Affairs at Princeton University and Mark W. Riepe, vice president of investment products at Charles Schwab (SCHW), outline the dangers of overconfidence. It's too easy, they say, for both advisers and clients to believe they'll beat the odds and their plans will unfold exactly as projected.

"The ugly truth about financial planning is that none of us can predict anything," Klontz says. "The adviser needs to be honest with clients and say, 'This is the best we know how to do. Things will happen – such as the economic crisis in Russia – that we can't control.'"

Kahneman and Riepe write that advisers need to be aware of the human tendency to be overconfident and should always couch investment recommendations with the caution that there's no such thing as a sure thing. Beware of an adviser who loves to make bold predictions, they warn.

3. Your Adviser Serves Up the Same Generic Advice

"Consumers are saying, 'If I'm paying 1 percent to 2 percent, what am I getting for that?'" says Frank Troise, founder of My New Financial Advisor Inc., a matching service for clients and advisers. "Consumers are refusing to pay the traditional fee structure unless they see the direct value. The adviser needs to discuss fees and not resist that."

Troise says investors should ask how to unbundle their portfolios to direct some money into low-fee mutual funds that don't shave as much off returns. Also, see if you can be just as well-served by paying an hourly fee to get specific questions answered instead of a standard charge for the total amount the adviser is managing.

"For the majority of consumers, it's 'Why am I paying 1 percent when I can buy an index fund? Where are you adding the value above what I can do myself?'" Troise says. "Force the adviser to break it down. Those are the tough questions where the wheels come off, but when the adviser creates value well above market returns, that's where the compensation is worth it."

4. Your Adviser Can Cope With Your Big Life Changes

People often reassess their relationship with their adviser when they are about to get married, have a child, manage an aging parent's affairs or deal with another major transition, says Kimberly Clouse, chief client advocate with, a digital money management service.

Major changes like these invoke a web of decisions, including legal, tax and insurance considerations. You need an adviser who can help you pull together the pieces in a strategic way. "If you mark your adviser's newsletter as spam," that's a sign you don't have a lot of confidence in his or her insights, she says. "When you walk into a meeting with your adviser, it should feel like an ongoing conversation, not that they're reading your file while you're catching up on the weather."

One way to clarify your adviser's point of view: Ask if you are an outlier in his or her practice. In other words, are you the only one, or one of a few, in a similar life stage? If so, your adviser is mainly concentrating on people with different needs and will always be playing catch-up when it comes to people like you, Clouse says.

5. You Think Breaking Up Is Hard

The mechanics of transitioning to a new financial adviser are easy. In fact, the new adviser typically handles it by calling the old adviser and managing the paperwork. "The perspective is that it's a massive change, but in reality, you're signing three or four papers," Klontz says. And, by law, an adviser cannot impede the transition process.
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