Changing your portfolio, or thinking you need to make changes to your portfolio, can seem to make a lot of sense from time to time. Of course, it can make sense if it is done for the right reasons, like a change in your attitude about investing or a life change which alters how you should invest for the short or long run. However, advisors and advisory firms imply that they provide value (more value than what they charge) by making or recommending periodic changes to their clients’ portfolios. They say things like “the old buy and hold strategy doesn’t work anymore” or “we stay on top of the market” to identify opportunities, etc…
So, if you are working with an advisor that is promoting this type of approach, I would encourage you to ask these questions:
1) When they say they are watching the markets continuously, ask them specifically what that means. Every minute? Every hour? Saturday night at 1:27 AM? Christmas Eve?
2) If they discuss making changes to a fund or an asset, ask them what specific measures do they use to reach the decision to make the change. Why, exactly, is a fund replaced? Is it replaced after a gain or a loss?
3) Ask for a record of economic or market forecasts that they or their firms have made for the last 10 years and if these forecasts were correct. Ask for 3 or 4 examples of specific recommendations that they made in which their clients were better off than if they had simply not done anything.
4) If they have made a correct call on the change in the market (any market), ask them if their firm was able to follow that up with another correct call when the market would again reverse course.
5) Ask them for any new investment products their firm has introduced in the last 5 or 10 years. Ask why the new products were introduced and how they performed for several years after introduction.
6) If your advisory firm indicates that they have a portfolio that is specifically tailored to each client, ask how many portfolios they actually offer. Is it, 5, 6, or 7, something like that, and then do just they slot each client into one of the portfolios?
7) Please provide an easy to read breakdown of who gets paid, how much they get paid, and provide a listing of any commissions an adviser receives or any revenue sharing between investment firms.
These questions will help you get to the core of what an advisory firm or representative purports to do. Surely they would document their history of analysis and decisions for their clients to see. This is their track record.
Finally, I would to get these answers in writing! I wouldn’t hold your breath waiting for a response.