Why Monitor Your Advisor?
The answer is ominous because it is a major source of financial risk. However, the risk is easy to avoid if you are willing to be proactive.
Answer: No advisor will volunteer information that would cause you to fire him or stop buying his investment recommendations. Therefore, withheld information has the potential to damage your financial interests.
Solution: You need a process that asks advisors the right questions and requires them to document their responses.
Early Warning System
Think of monitoring as your early warning system. For example, a large number of your advisor's clients terminate him for cause. You may never know what the cause is, but large client losses are a major indicator of an underlying problem. At a minimum you can discuss the issue with your advisor. Or, you may conclude you should terminate your advisor for the same reason as the other investors.
Regardless of your action, monitoring provided the warning. Now it is your choice how you act on it.
No Surprises!
Similar to early warnings, you do not want surprises in your relationship. For example, you are surprised when you find you have been paying very high expenses compared to other investors for the same services. Every dollar of expense is one less dollar you have available for your future use.
You could have avoided the surprise if you had information that documented your expenses. Sometimes you don't know what you don't know.
Who Monitors Your Advisor?
You have three choices:
- Let the advisor monitor himself (bad idea)
- Develop a process and you monitor the advisor (time consuming)
- Use a free Watchdog service that monitors your advisor for you (easy and objective)
Should Advisors Monitor Themselves?
Absolutely not. You will only hear what advisor's want you to hear. You will have no idea what information has been withheld by your advisor. You should not let advisors monitor themselves for the same reason you do not hire a fox to guard your chicken coop. They both have conflicts of interest.
Should You Monitor Your Advisor?
It depends on three factors:
- Do you know the right questions to ask?
- Do you have time to develop and implement the process yourself?
- Can you be objective based on your relationship with your advisor?
We recommend quarterly. Monthly is too frequent and annual is not frequent enough.
Why Require Documentation?
Verbal information benefits advisors, in particular lower quality advisors, for two reasons:
- It maximizes the impact of their personalities and sales skills
- You have no record of what was said to you
Let's say you have a legal dispute with your advisor. All of the evidence supporting your claim is based on verbal information that was provided by your advisor. It is your word against the advisor's. You will not win because you have no documentation for what was said to you.
Documentation protects your financial interests.
Not My Advisor!
No matter how much you like your advisor, even if your advisor is a close friend, you should monitor specific information that impacts your financial interests. If your advisor is a real friend, and he has nothing to hide, he will understand monitoring is a necessary part of the relationship.
Do not be concerned about asking your advisor questions. He asks you a lot of questions. Plus, it's your money and it is still a business relationship that determines how much money you will have for your future use - for example, retirement.
If you are concerned, let Watchdog ask questions for you.
Source of Data
The source of data is the advisor or the advisor’s firm because there are no other sources for most of the information.
Types of Data
The types of data that are monitored will vary by investor. Some investors are going to be more thorough than other investors. For example, Watchdog Monitoring asks 12 types of questions and you select the questions you want asked.
Five key types of data should impact your decision to retain the services of your current advisor
- Does your advisor have any new disclosures on his compliance record?
- How did your assets perform in the most recent quarter?
- How much risk did you take to achieve this performance?
- What were the total expenses that were deducted from your assets?
- How many clients did your advisor lose last quarter?
Failure to Report
Some advisors may refuse to provide information that is requested by you or Watchdog. If this happens you should terminate your relationship with the advisor. You do not have to know what information is being withheld, or why, you just have to know the advisor refuses to respond.
Advisors refuse to document responses for three reasons:
- They may have omitted, misrepresented, or exaggerated information in the past
- They do not want to provide written responses
- You will terminate their services if you have this information
The advisor is no worse off when he refuses to provide information. You will terminate him if you do or do not have the information. Most advisors will try to use their relationship and sales skills to preserve their relationship with you. Consequently, by not providing the information, they still have a shot at convincing you to keep them.
The principal issue is how are you better off?
