Taking Stock Of Your Adviser

Many investors don't know how to evaluate the person in charge of their portfolios. These seven questions should help

They come bearing different labels: financial advisers, financial consultants, financial planners, and registered representatives. A few still go by the moniker of broker. Whatever the name, an estimated 650,000 of them provide services to individual investors. How do you know if the adviser you're working with is any good?

There's no central database that lets you punch in an adviser's name and pull up basic data on performance, risk, fees, or background. "The most surprising thing is that so little research is done on [advisers]," says Peter Tufano, professor of financial management at Harvard Business School. No wonder that 92% of investors surveyed say they don't know how to assess the quality of their advisers, according to an online poll of 1,052 investors by Paladin Registry, a service that helps investors select financial professionals.

In interviews with dozens of investors and financial advisers, BusinessWeek found that evaluating your adviser requires some rigorous quantitative analysis as well as subjective scrutiny. Here are the key questions to ask:

How well am I doing?

Many people make the mistake of comparing the performance of their investments to a popular stock market measure, such as the Dow Jones industrial average or the Standard & Poor's 500-stock index. Stephen Wetzel, a certified financial planner in Yardley, Pa., says your adviser should be giving you reports comparing your results with a composite of indexes that mimics your asset allocation strategy. So if your plan is to have 75% in stocks and 25% in bonds, your benchmark could be 75% S&P-500 and 25% Lehman Brothers (LEH ) U.S. Aggregate Bond index.

How much is it costing me?

The job of a financial adviser is to make money for you, so if your portfolio is growing, that's a good sign. But at what price? At a bare minimum, advisers should provide gross returns as well as net returns so you can assess how much you're paying for performance, says Jack Waymire, author of Who's Watching Your Money and founder of the Paladin Registry (paladinregistry.com). If the difference between gross and net returns is more than 1.7 percentage points, ask your adviser for a discount on the fees. Give your adviser the boot if you are paying more than two percentage points of expenses on a $1 million portfolio, he says.

Am I getting good recommendations?

When your adviser suggests a mutual fund, ask how long she has been using the fund. "If this is a fund the adviser just started recommending, you want to know why," says Randy Kurtz, chief investment officer of RK Investment Advisors, a New York money management firm. Advisers should always be able to suggest several alternatives, too.

Truth be told, advisers don't have a great track record picking funds, according to a study co-authored by Harvard's Tufano. Looking at data from 1996 through 2004, the study found that the funds brokers select -- especially equity funds -- deliver lower risk-adjusted returns than funds picked by individual investors. Results are even worse when sales charges are factored in. The study also found that do-it-yourselfers do a better job of timing the markets than advisers.

Your adviser also should be up-to-date on the latest investment vehicles, be they hedge funds, exchange-traded funds, or private equity. So pop some questions about those to see what kind of response you get.

Is my adviser putting my interests first?

Last year when Coco Lewis, a real estate agent in Fremont, Calif., wanted to cash out some of her portfolio to invest in property, she asked Jennifer Cray, her financial adviser, to review the investment. Not only did Cray agree that Lewis should withdraw $125,000 from her portfolio, she rebalanced the portfolio within 24 hours. "I feel like she really cares about what's happening with my money," says Lewis, 54.

How often do I hear from my adviser?

Getting together on a regular basis is crucial to discuss results and make necessary changes. "People think they can rebalance their portfolio once a year, but the Russell 2000 was up double digits in the first quarter," says Thomas Meyer, chief executive officer of Meyer Capital Group, an advisory firm in Marlton, N.J. "You can't wait a year to tweak your portfolio."

Dr. Charles Gaudet, a plastic surgeon in Portsmouth, N.H., values Jennifer Lane, his Boston-based adviser, because she's constantly in touch -- once a week by e-mail, every other week on the phone, and he meets with her frequently. Not every investor needs or wants that kind of handholding, but you should be getting updated at least quarterly.

Do I need more than investment management?

Making investment decisions may be all you need from a financial adviser, but most people require a broader range of services, such as debt and expense management, tax advice, and college planning. Is your adviser capable of providing that?

In addition to overhauling his wills, insurance, and college savings accounts, Gaudet's adviser may have even helped with his marriage. At Lane's urging, Gaudet and his wife now sit down once a week to pay bills, rather than waiting to do it once a month. "We haven't always communicated well in terms of money," Gaudet, 56, admits. When he wanted to save for retirement, his wife preferred to spend on a vacation. Now, he's confident that he'll be able to retire at 65.

Still not sure if your adviser is up to snuff?

Ask for advice from someone you trust, such as an accountant or lawyer. Carole Edelstein, 60, a widow in Fort Lauderdale, recently got a vote of confidence for her adviser after her estate attorney, Mo El Deiry, reviewed her portfolio. The combination of separately managed accounts as well as her portfolio's focus on income caught El Deiry's eye. In fact, El Deiry liked what he saw so much that he asked Edelstein's adviser, Harold Pomeranz of Ryan, Beck in Hewlett, N.Y., to come to Florida to meet a dozen other clients, many of them widows on a fixed income.

Or you can hire several advisers and let them duke it out. That's what Bob Jackson, 62, a retired Houston computer executive, did. He parceled out his $6 million portfolio among three different advisers. After six months, he put one who wasn't performing well on probation, and fired him two years later. Right now, the better performing of the remaining two controls 70% of Jackson's holdings.

Returns are important, but Jackson suggests keeping tabs on your advisers in other ways, too, such as asking them the same questions. Says Jackson: "You learn a lot when you get different answers."

By Lauren Young, with Greg Hafkin

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