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Financial advisors aren't going to show up at your door with flowers and chocolate, but yours should be wooing you with sound advice and solid portfolio returns. If not, it might be time to break up.
The Dow Jones Industrial Average and S&P 500 both ended 2020 with record highs and have continued their streak into 2021; a well-diversified portfolio will reflect that. If your returns are negative or lower than they should be, reconsider the investment advice you’re getting. But it's not just about returns. There are many other reasons people seek financial advice, from estate planning to tax preparation, and if you’re not getting what you need, it’s time to say goodbye.
Here’s how to know it’s time to find a new financial advisor, and how to make the switch.
Should I get a new financial advisor?
Here are some reasons experts say you should find a new financial advisor:
- Poor Portfolio Performance. When you head in for your quarterly or annual meeting, most financial advisors will give you a breakdown of your portfolio’s performance — and if not, you should ask for it. But that doesn’t mean much unless you have something to compare it to (for example, you won't know a 10% return isn't great unless you know the S&P 500 rose around 16% in 2020 ). Determine a benchmark for comparison ahead of time, like 60% S&P 500 and 40% Bloomberg Barclays US Aggregate Bond Index, or the average target-date fund performance for someone your age, says Brian Allen, a certified financial planner and founder of Pension Consultants in Springfield, Mo. If your performance is lagging, it might be time to find a new one.
- Conflicts of Interest. There are many different ways advisors can make money, and while some are upfront about it, others keep it hidden. If you find that your financial advisor pushes certain investments on you, check their disclosure (called Form ADV) to see if the advisor receives a commission for doing so. You can ask for the form directly, or find it via a search on the Securities and Exchange Commission's Investment Adviser Public Disclosure website. If he or she posts on social media about being named a “top advisor” for an investment management organization, ask if the advisor receives fees or goes to conferences on the organization’s dime, Allen says. If they're receiving fees from a certain organization, they may be more inclined to push you towards its products.
- A Bad Relationship. If you find yourself avoiding meetings with your financial advisor, ignoring his or her calls or withholding information, find someone you're more comfortable with. There could be several reasons for this: maybe there's too much financial mumbo jumbo that you don’t understand, and you’re too intimidated to ask your questions.
- Rigidness. When life changes, so should your financial plan. If you get married or inherit valuables from your grandparents, your advisor needs to show attentiveness to your shifting circumstances, says Abed Rabbani, CFP and assistant professor in University of Missouri's personal finance department. For example, if you have a baby, your advisor should talk to you about how you can start saving for education.
- Overcharging. If you’re paying too much, it’s time to leave. Financial advisors’ rates vary, but the average fees are 1-2% per year of assets under management, an hourly fee of $100 to $400 per hour or a fixed fee of between $1,000 and $3,000 for a one-time session to create a financial plan, according to financial advice site SmartAsset. If you're working with an advisor who is paid through commissions, you might never see a bill. But that doesn't mean the advice is free, since commissions eat into your investment returns.
When should I switch financial advisors?
Now that you’ve decided you’re going to change financial advisors, you need to determine the best time to do it.
Check your contract to see if there are any issues with ending the relationship mid-year, Rabbani says. If an annual fee will not be prorated if you leave before the end of the year, you may want to postpone the switch. Keep in mind that there may also be termination fees, which you’ll be able to find in the contract or by asking your current advisor (as awkward as it may feel).
Changing who manages your portfolio could have some tax ramifications, as the new advisor may sell out of certain investments and into new ones, which could trigger capital gains taxes if you're selling a security that's appreciated. Most financial advisors are used to this when bringing on new clients who are making changes to their taxable brokerage accounts, Allen says. Keep in mind when it's most beneficial for you to incur the capital gains tax — maybe you want to sell half of your appreciated investment at the end of the year and half at the beginning of the next, to split the bill over two years, for example.
What is the etiquette for changing financial advisors?
This is the hard part. It’s okay to be nervous about ending a relationship with someone who knows so much about something as intimate as your financial worries and successes.
“It feels like a divorce, like breaking up,” Rabbani says. “Emotionally, it’s not easy.”
So try to take out the emotion and recognize that the process is pretty straightforward: you simply have to write a signed letter to your advisor to terminate the contract, or have your new financial advisor do that dirty work. It’s polite to give the advisor a heads up before you send the letter via an email or phone call. If you’re looking for the right words, Rabbani suggests something along the lines of, “This is nothing personal, it’s just what is best for me and my family right now.”
You definitely want to stay on your advisor's good side, as the end of the relationship doesn’t necessarily mean you’ll never need to contact him or her with questions again. Your advisor has documentation of all your financial moves, so when you’re revisiting something you did much later — or even just when you’re filing your taxes next — you may need their help. Make sure to get the transaction history from the old advisor because if anything goes wrong with the transfer, you will have the records on file and it can help your new advisor get up to speed, Rabbani says.
How should I find a new financial advisor?
When you’re looking for your new advisor, first recognize exactly what you need. Is it investing advice, retirement planning, tax help, general budgeting and saving or something else? The answer will help determine what type of advisor you need, whether that’s an investment advisor, stockbroker, certified financial planner or robo-advisor.
Only some of these advisors must adhere to the fiduciary standard, which requires advisors to put their clients’ best interest ahead of their own. Ask a potential new advisor about compensation — if it’s by recommending certain products to you, that could be an advisor held to a lower standard of care, which you want to avoid.
If a broker promises careful oversight over your portfolio, ask what that really means. Often, after your money is invested, "they're not actively watching it," says Toby Mathis, a founding partner of Anderson Law Group in Las Vegas.
Do your background research with tools like FINRA’s BrokerCheck, where you can find information about an advisor’s experience and if he or she has faced disciplinary actions, and SEC’s Investment Adviser Public Disclosure website, where you can confirm any certifications they say they have.
Like any new relationship, you also want to make sure there’s chemistry. Make sure he or she is interested in your goals, why those goals are important to you and how you consider your relationship with money, Rabbani says. It shouldn’t just feel transactional.
Reflect on why you decided to find a new advisor in the first place, and make sure the new one has what was missing.