Chris McCauley, CPA, Esq.
Top 12 Signs It’s Time to Fire Your Financial Advisor
Great work on being responsible for your financial security and getting a financial advisor (which I'm defining in this blog as any hired financial professional) to help you figure out what to do with all the cash building up from your contract.
Now that you've been working with this financial advisor for some time, you've probably got a good read on his or her professional demeanor.
During this time, maybe your experience has been great, which is awesome, but maybe it has been less than stellar on account of your financial advisor not doing things you've ask or the word "shady" frequently keeps coming to mind. If you're in the latter group, you might now be wondering, “is it time to fire my advisor?”
Sometimes the relationship with your financial advisor can be quickly corrected with better communication, such as "Hey, can you return my phone calls more quickly?" In other instances, however, the damage is irreparable, such as fraud, and the financial advisor needs to be let go.
While fraud of any kind is grounds for immediate termination, I’ll share with you in this blog post 12 other signs that it may be time for you to fire your financial advisor.
1. They don’t spend time getting to know what you need
Before you transfer any of your money over to your advisor, grant access to any of your accounts or give any power to your financial advisor to handle your money, your advisor should spend time getting to know your current financial circumstances and where you would like to be in the future financially. If your advisor is asking questions related to any of the following, you’re at least off to a good start:
Your current financial position (your assets, liabilities and revenue streams);
Your personal concerns and expectations about your career;
Any estate plans that may be in effect or is being developed;
Any tax plans that may be in effect or is being developed;
The size of family and/or estimate of number of people you want to support; and
Your short-term and long-term financial goals
If at the time you met your financial advisor, he or she seemed more eager to get your funds in the door than getting to know you first, you should reconsider the reasons you're working with this financial advisor. Their priorities might not be in alignment with yours.
While some of these questions may seem a little invasive, the point in asking these questions is to use the information to develop a financial strategy that fits your specific needs.
How can a financial advisor begin to develop a strategy for you without understanding where you are now and where you would like to be? They can't, which is why this is a sign that you might need to fire him or her.
You give your financial advisor $100,000.00 to invest. You plan to use this money for a down payment on a home in three years, but your advisor never asks you about your financial goals. Without knowing your plans, your advisor ties up your money up in a 5-year $100,000.00 certificate of deposit. Now, when you try to withdraw those funds in 3 years, the bank will hit you early withdrawal penalty, and you’ll be forfeiting two years of interest.
As you can see, this initial communication, plus continuous communication throughout your relationship with your advisor, is important to you and your overall financial picture.
So if you're thinking back now, and realizing your financial advisor didn't, and still hasn't, really asked about your needs and doesn’t regularly communicate, there's still time to rectify this issue.
Simply ask to set up some time to talk, and then go over your plans, expectations and hopes, and ask the financial advisor how his or her strategy falls in line with your plans. After this conversation, you should have a good reading on the competency of your financial advisor where his or her concerns truly are located.
2. You feel pressured to make decisions when you’re not ready.
Aggressive sales tactics are signs that the financial advisor is not for you or anyone for that matter. Fortunately, aggressive financial advisors are very easy to spot. They’ll use phrases such as any, or all, of the following:
“This is a limited time offer.”
“You must act now.”
“This deal won’t be on the table for long.”
“Once in a lifetime opportunity.”
Take phrases like these, and others that are similar, as warning signs that your financial advisor needs to go.
If you’re getting phrases like these from cold calls, be especially careful. They are common with boiler rooms (which is typically a makeshift brokerage office that involves an aggressive sales team offering unsuspecting customers securities of certain issuers in large volume by telephone or direct mail), which is another reason why you should be wary of financial advisors that use them.
In a situation where you are ever caught off guard and you feel especially pressured, tell the other person, “you need to talk to your attorney first.” Even if you don’t have one, this should be enough put fear in that advisor that he or she needs to back off.
3. They don’t clarify how they’re paid.
One of the best ways to take advantage of clients is to create a cloud over how fees are charged. Attorneys do it. Brokers do it. Investment advisers do it. They do it despite many rules of professional conduct explicitly prohibiting it.
A rule of thumb to remember is that you are going to be charged for every investment you make, either as an advisor’s fee or a commission. In some situations, such as an investor in a hedge fund or private equity fund, you will pay a management fee and a percentage of the overall profits. If your advisor avoids your questions about he or she is being paid, suggests that some of the services they are providing are free or tell you “not to worry about it,” be wary of that advisor.
In my experience, I’ve seen professional athletes being especially susceptible to business professionals overcharging and double-dipping, mainly because there are many ways to collect fees, and if someone is not watching an advisor carefully or regularly reviewing the details of fee arrangements, it is very easy to get hit with all of them. Additionally, with the busy schedules of professional athletes, it's difficult to go through all the statements that may be sent out by advisors. Some advisors know this and will take advantage of it.
While these are not all the types of fee arrangements, the following list contains the most common methods financial advisors use to charge clients.
A. Percentage of Assets Managed
This method is fairly common with investment advisers (adviser here is spelled with an "e" on purpose, since it's a legal termed used by securities regulators). As your account grows, so does their cut. For example, if you provide $2,000,000.00 to an investment advisor, and they charge an annual management fee of 1.0%, your advisor will receive $20,000.00 in fees for managing your fees for the year. This way, they do have an incentive to increase the balance of your account. Generally, the more assets that are managed, the lower the fee.
If you’re working with an advisor that charges a percentage on the assets under managed, you’ll want to ask if he or she is fee-only or fee-based. With fee-only, your advisor cannot make any commission fees. A fee-based advisor can make commission fees and earn a percentage on the assets under management.
B. Project-Based Flat Fee
You may encounter a project-based flat fee when you need to have a specific project completed by a financial advisor. For example, if you wanted an analysis on a security with a recommendation on whether to buy it prepared for you, the analyst might charge you a flat fee for a single report. Another example is if you wanted someone to help determine the ideal asset mix for a retirement plan, you may also be charged a simple flat fee for completion of this research.
A commission is the most straightforward fee arrangement. You buy something, you get charged. The key item to find out is which activities drive the commission, and the answer to that question is what you'll want to watch.
For example, if your broker is getting a commission on ever trade they make on your behalf, you’ll want to monitor how often trades are being made, and if the trades really have substance to them, or if they are just a way to generate fees. While this is clearly unethical, these things happen. So remember to find what drives commissions.
Knowing how your advisor's commission fees helps you to understand the motive behind some of the products he or she might try to sell them. Whenever you get a recommendation for a product, simply ask, "are you earning a commission off of this?" If they are, ask them, "how does this help me get to my financial goals?" Obviously, there's nothing wrong with earning a commission, if the product will truly help you.
As previously described, a fee-based advisor may receive a commission and a percentage of assets under management or another type of fee. In contrast, a fee-only advisor cannot take commission fees on transactions.
More specifically, a fee-only advisor cannot obtain compensation from anywhere else (such as a brokerage firm, a mutual fund company or insurance company) except from you. A fee-only advisor may charge you a percentage of assets under management by him or her, an annual flat fee or an hourly rate. The good thing about fee-only advisors is that they work for you and are required to look after your interests.
In contrast, a fee-based financial advisor can receive compensation from other parties, such as those mentioned above, AND from you.
You give your fee-based financial advisor $2,000,000 to manage for you. For his or her management services, you're charged a 1.0% annual management fee. Your advisor decides to purchase a variety of investments from a brokerage firm that also pays a 0.25% on the transaction amount. The purchase your financial advisor makes is $500,000 which means he or she collects an aggregate of $1,250.
This fee arrangement is legal and common, and there's nothing wrong with it on its face. You just want to make sure you understand how your money is going back out the door to your financial advisors and who else is paying your advisor. This information should be made clear to you with a disclosure of fees made to you. If they don't provide one, you can always ask.
E. Hourly Fees
In some circumstances, you may only want to rent someone’s brain for a few hours or so in order to get advice on particular investment. For example, if you wanted someone to help you set up your employer’s 401(k) plan and recommend an asset mix for your plan, you may be able to get this help without worrying about paying a percentage of profits, percentage of assets under management or a commission.
Questions to Ask Your Advisor:
In an email, so you'll have a written record, ask: “How do you get paid? Commission? Flat fee? Some other method?”
It will also help you to get clarification on exactly what kind of services are they providing. Is it planning? Advice? Management? A combination of all of it? Knowing the services will help you understand how and why you're being charged.
After all your questions, if you feel there is still no clarity or you discover a pattern of billing that does not match what your financial advisor previously told you, it’s time to cut that financial advisor loose.
4. You’re left in the dark on changes made to your account, your financial advisor or the financial advisor’s firm.
Being the last to know about something, especially when that information specifically pertains to you, is never a good feeling. At some point, we’ve all experienced that feeling, which is why a financial advisor who negligently, recklessly or purposely does not promptly fill you in on changes made to your account, your advisor’s role with a firm or the firm itself may need to be kicked to the curb.
You don’t need to know every single thing that goes on, but there are several significant changes that you should know very soon after it happens:
Your financial advisor leaves the company you originally hired
Your financial advisor loses his/her license
Your investment funds have been used outside of your direction
Your account has been charged incorrectly
There has been a material change to one of your investments.
Do you really want to find out through the television or Facebook that one of your investments completely folded? I wouldn't either.
While one instance of forgetting to disclose news to you may be forgivable (depending on how significant that failure to disclose was), several of them are unacceptable. When it comes to your financial security, you really don’t want to be kept in the dark on it.
5. You don’t get periodic reports or statements as scheduled or promised.
Depending on your investment, you should receive investment reports on a quarterly and annual basis and account statements on a monthly basis. For some securities, especially for publicly traded companies, you can pull their quarterly and annual filings directly from the Securities and Exchange Commission portal called EDGAR (Electronic Data Gathering Analysis and Research).
To do this, find out the exchange ticker, such as “FB” for Facebook, and enter into the Fast Search ticker field shown below (click the image to be taken to EDGAR):
For reports for funds and private companies, you may have to get these directly from your financial advisor and/or issuers. These reports will tell you how your advisor, fund or any other investment is doing financially.
For reports from your advisor and funds, you should be able to see all the realized gains and/or loss (that is, the money you’ve actually made or lost from the sale of an investment) and all the unrealized gains and/or losses (that is, the move you would make or lose if you sold your investment.) You should also be able to see performance compared over various periods, such as quarter over quarter, year over year, 5-year average, 10-year average, etc.
Reports from private companies, such as a small business, will more than likely come in the form of financial statements. As a private company, they will have fewer requirements placed on them for disclosures, but at a minimum, you should be able to receive an income statement and a balance sheet. Ideally, you would receive a cash flow statement to analyze how actual cash is flowing in and out of the business.
As a side note, you may have to look into any agreements you’ve signed with the private company to determine the reporting requirements. In some cases, they may only be required to provide you with just an annual report.
In addition to reports about your investment, you should also receive a monthly statement from your advisor (if it's not already included in any of those reports) that details all of the transactions that have occurred during the month. These transactions may include:
positions in certain investments.
Regardless of the type of report you receive, the frequency (at a minimum) should be quarterly and annually. Anything less than that should raise an eyebrow and cause you to go back to your advisor and request more information on a regularly scheduled basis.
You shouldn’t have any resistance upon asking for more information, but try to obtain online access to your investment accounts, this includes accounts with advisors and any other financial services companies you might use. By doing this, you help reduce the chances of your advisor manipulating any of your reports and getting away with questionable behavior. Instead of allowing your advisor to be an intermediary, you’ll be getting your information directly from third parties and not relying on your advisor.
6. Your statements don’t look professional.
Unfortunately, putting together a report is fairly simple. Someone with basic Microsoft Excel and Word skills can whip together a report and send it your way. Fortunately, keeping together a long con produces stress on the scammer, and eventually, the fraud will show.
Of course you don’t want to wait until the last minute to find out because your money may be gone by then. To protect yourself, keep your statements and compare them with each other on a regularly basis. Some of the things you’ll be looking for include:
Consistency in format,
Reasonableness of numbers,
Fees that don't match with the fees promised,
Photocopy marks that might resemble physical copying and pasting, and
7. They take too long to response to your requests.
Depending on your advisor and how much in assets you have under management, you may be priority or at the end of the line. Not all advisors work this way, but some advisors definitely do. As an example of how this works is when clients for a brokerage firm with accounts less than $100,000 being shipped off to a call center for questions where $500,000 or more receives direct access to brokers.
The best way to gauge whether they’re moving you to the back of the line is to clarify what kind of service you can expect to receive before you agree to have them manage your finances. You’ll then want to hold them accountable for that promise.
If your advisor claims all responses will be directed to him or her, and you’ll get a response within 24 hours. Expect that treatment, and for any exceptions, expect an apology when he/she finally responds. I don’t advocate dropping your advisor the first time he/she falls through, but I would keep track of the times they’re failing to live up to promises they’ve made to you, and then decide whether you've had enough.
8. They’ve lied about anything
This one is pretty straightforward. There are no acceptable reasons for your advisor to lie to you about anything. Trust is critical.
9. Your advisor asks you to make checks payable to him or her.
Making checks payable to your advisor is completely unacceptable and unprofessional in all circumstances where you are a client. Even if you are reimbursing your financial advisor for business expenses already paid by him or her, your financial advisor should be providing you with an invoice on company stationery.
There are three main reasons why you don't want to cut checks directly to your advisor:
To maintain a professional wall between financial advisor and client,
To avoid encouraging an already questionable advisor to commingle funds,
To reduce the chances of setting a precedence that your financial advisor can use later to have you write increasingly larger checks payable to him or her.
There are some underlying principles that accompany why checks made payable to your advisor is troubling.
First, a legitimate advisor is going to be working for a legal entity, such as a limited liability company (LLC) or limited liability partnership (LLP). There’s just too much risk in managing funds of other people in an individual capacity to provide financial management services without the protection of a legal entity. As a result, if he or she is, in fact, managing funds in an individual capacity, you should consider finding a new financial advisor.
Second, if we assume there is a legal entity that is being used and you are writing checks to directly to your financial advisor, he or she will be placing those funds into a personal account, rather than a business account. The exception is if he/she makes a special endorsement that transfers the right to your payment to the legal entity, but these types of endorsements are rarely done, and if this was going to be done, the check can be made directly to the business in the first place.
In conclusion, it's in your interest to no make checks payable directly to your financial advisor.
10. They don’t understand or ask about your risk tolerance.
As a professional athlete, you are more than aware of the risks you’re exposed to when it comes to how many years you statistically have to compete and earn money from competing. Ideally, your advisor should know this information as well, and refrain from placing your money in highly risky investments. Even when knowing your industry, it’s high turnover and the risk of occupational injury, a good advisor will still ask you questions about your risk tolerance so they can direct your investment funds accordingly.
For example, as a professional athlete, you realize you have a short window to maximize lifetime earnings, so as the prudent athlete you are, you might request having your investment funds place into investments with a low risk profile, such as bonds or income stocks (that is, stocks that are fairly stable in price but usually pay competitive dividends.)
Ultimately, a qualified and competent advisor will be able to put together a portfolio that meets your appetite for risk AFTER they understand how much risk you’re comfortable taking. So if they aren't asking about your risk tolerance, this might signal his or her level of competency in handling client funds.
As an example of an aggressive advisor, check out the story below regarding Darren McFadden and his advisor who places $3,000,000 into a highly risky bitcoin investment.
Fraud and Professional Athletes: Dallas Cowboys RB Darren McFadden Files $15M Lawsuit Against Former Business Manager for Fraud.
11. They ignore what you’ve specifically told them you wanted or didn’t want.
After you told them about your risk tolerance, have they been honoring your preferences? Did they put your investment funds in a tech startup started by a neighbor’s cousin after you told them conservative investments only? Anytime they've ignored your requests, it's time to let them go.
Whether your advisor follows your directions doesn’t extend only to your investment preferences. This could extend down to something as simple as telling them to send you electronic statements versus statements in the mail.
The main issue here is their willingness to listen to your requests and follow through with them. When you think about it, do you really want to hand over a significant amount of your money to someone who can’t follow through with your directions?
See Fraud and Professional Athletes: Mark Sanchez, Jake Peavy and Roy Oswalt Fall Victim to $30 Million Investment Scheme. In this scheme, players informed investment adviser to invest in low risk, conservative investments. Alleged fraudster did the the opposite.
12. They don’t have a specific investment philosophy
Your financial advisor should have an investment philosophy, which is a basic set of guiding principles that form the foundation for a financial advisor’s investment decisions. These can vary across the board. Some of the common investment philosophies are:
A. Value Investment Philosophy
An advisor using this philosophy seeks out undervalued investments, hoping they will eventually produce a nice return when the market realizes the value.
B. Fundamental Investment Philosophy
An advisor using this philosophy spends time in the financial statements of companies, trying to identify companies with strong earnings and favorable ratios.
C. Growth Investment Philosophy
An advisor using this philosophy looks for investments with significant growth potential. These opportunities may make themselves available in emerging markets, new industries or innovative companies.
D. Socially Responsible Investment Philosophy
An advisor using this philosophy looks for companies that are socially driven (or at least gives the impression they are socially driven). These companies may show themselves as having sustainable sourcing, favorable labor conditions, profit-sharing with nonprofits, green energy and so on.
E. Technical Investment Philosophy
An advisor using this philosophy lives in graphs and charts, trying to identify trends before the rest of the market can. These advisors look for patterns in the market in order to make his or her investment decisions.
F. Contrarian Investment Philosophy
Some people have made a significant amount of money from this strategy. Essentially, the advisor does the opposite of whatever the majority of the market is doing.
Some of these investment philosophies by nature are riskier than others, but all, if done well, can be absolutely brilliant.
For you, your advisor should at least be able to articulate one of these or a hybrid of various investment philosophies. Failure to do so, should be enough for you to question his/her competency as a person handling your financial security.
As each situation is unique, you’ll need to weigh the infraction against your other options. For example, if your financial advisor forgets to return a phone call on one occasion, should you fire him or her? Probably not. But in contrast, if your financial advisor never returns your phone call on any occasion or repeatedly takes his/her time to return it, maybe then you look for other advisors.
This list is certainly not all the signs that your financial advisor may need to be replaced. Do you know of any other signs that signal it's time for a financial advisor to be fired? If you do, please share in the comments below!
Chris McCauley, CPA, Esq. is the founder of McCauley Investment Risk & Legal Consulting PLLC, a Seattle-based law firm dedicated to helping professional athletes guard their earnings and investments. Chris is an attorney licensed to practice in Alabama and Washington and a CPA licensed to practice in Washington and North Carolina.