There are financial advisors who are almost priceless, pointing their clients to good deals and, where the omens are not good, steering them away from folly. There are other advisors such as the infamous former U.S. mogul Bernie Madoff who leave clients in tears and their accounts in bankruptcy. It is not necessary to be an expert investor to tell if your advisor is on your side or his. The tracks advisors leave can tell you a lot. Indications of problems include:
1. Your advisor is urging you to buy a stock or other asset for the wrong reason. “There may be cases in which an advisor is putting clients into products for the fees he or she earns rather than the best interests of the client,” says hedge fund manager Tony Warzel, president of Rival Capital Management Inc. in Winnipeg. “There may be time when a broker, for example, has a lot of stock or bonds it owns and wants to peddle them. Before you get jammed with product, check out the deal or the asset on the Web.”
2. Your broker cannot explain why he or she wants you to be in a certain asset. Then you should seek someone who can make sense. “You have to be able to understand how an asset fits into your overall plan,” says James Hymas, President of Hymas Investment Management Inc. a Toronto-based specialist in preferred share investing. Just picking up stocks when they are cheap is no way to build a portfolio with a purpose, he adds.
3. Your have a bewildering number of mutual funds or stocks and you don't know why you have been sold so many. “There is no good explanation when the number of mutual funds starts to run up into many dozens,” Mr. Warzel says. “That is more than diversification. ”
4. You are paying for advice and management, but you wind up with just index performance. But if your fees for management, in which you entrust your advisor to make investments without specific approval, produce only index performance, you can just skip the fees and buy index mutual funds or exchange traded funds which mirror markets, says Graeme Egan, a financial planner and portfolio manager with KCM Wealth Management Inc. in Vancouver.
5. There is a lot of trading in your account without apparent purpose. It's called churning in the investment business. Even if you authorize trades on the advisor's recommendation, you should ask what's your gain The advisor's gain may be commissions or just helping get some assets sold. Trading generates commissions for brokers, but it may not translate into performance for the client, Mr. Warzel cautions.
– Andrew Allentuck