Rhonda Shantz, 45, a marketing consultant in San Rafael, California, learned this in the most painful way. "I had this fantasy that a great financial adviser would come along," she says. She’d stay busy earning money, he’d tell her where to put it and the returns would pour in. Shantz easily found a broker to cater to these dreams and gave him discretionary authority over her portfolio — allowing him to buy and sell without her approval.
After the first year, the broker rarely checked in, simply mailing her notifications about completed stock trades. She was getting a lot of mail — but earning very little. "Now I know that you need to have a partnership with a broker," Shantz says. Her new adviser insists on meeting for a quarterly review — even when Shantz tries to plead that she’s too busy.
Ask if he’ll nag you with calls and e-mails. When you check references, ask how consistent the adviser is with follow-through.
3. "I always beat the market."
So your brother-in-law has been bragging about his money manager whose investments always beat the market. Time to sign up? Nope.
First, it’s probably not true — hardly anybody beats the market consistently year in, year out. Even Warren Buffett has made bad calls. "I had this adviser who thought he always knew better than the market," says a corporate executive who lives in Los Angeles. The adviser was a longtime friend who had gone into investment work. The executive was so reluctant to fire him that she worked with him for 10 years. "My portfolio is still a lot smaller because I stayed with him. I’ll probably be paying for it for years."
Chasing the market is a classic investing mistake, made most often by men. "Most men think of investing in an adversarial way. It’s all about who has the biggest returns," says Mary Claire Allvine, a fee-only financial planner in Atlanta (and — full disclosure — my coauthor on two books). "Planning should be more holistic, about how we’re going to achieve our priorities."
Of course you want smart investments. But your adviser should be a comprehensive planner — typically a certified financial planner — who’ll create an overall strategy before recommending investments. Ask for a financial plan in writing.
4. "Let’s talk about your needs, then I can recommend suitable investments."
"Suitable" sounds safe. But in the financial world, suitable is a legal term, applying to investments that could reasonably be expected to help you meet your goals — even if it’s not the best way to meet them. For example, you want to invest for retirement, but you’ve got $30,000 of credit card debt. It might be "suitable" to invest in a mutual fund, but it’s probably in your best interest to first pay off debt. By law, many advisers wouldn’t be remiss if they recommended the mutual fund.
Diana Morrow, a marketing manager in Broomfield, Colorado, and her husband consulted an adviser, who was paid by commission, about retirement investments. He talked them into a life insurance policy with high fees, which didn’t do as well as other investments would have. Was it suitable? Sure. Her money grew — but not as much as it could have. "It wasn’t really clear until a year later that he hadn’t listened to our objectives," says Morrow, 41. They’ve since found a new adviser.
When Christine Carleton, a fee-only certified financial planner in Cincinnati, looked at one woman’s portfolio, she saw 600 trades in one year with growth of less than one percent. Investing in stock may have been suitable, but such frequent trading probably wasn’t in the investor’s best interest.
Don’t assume that working with a big, brand-name investment firm will protect you. As brokerage contracts now spell out, "Our interests may not be the same as yours." (It’s only been since January 2006 that the Securities and Exchange Commission has required that fine-print warning.)