Saturday, February 12, 2011

How A Poor Financial Adviser Delays Your Retirement Plans

Who cares about the economy? Investing in the stock market seem to be the in thing in town for 2011.

When it comes to investments, you have to monitor your portfolio closely, especially if you are going it alone. Entrusting your wealth to a professional financial adviser sounds like a good idea as they will be doing all the research and analysis work for you.

Though an adviser provides value, you should still know what is happening. It’s the only way you know that the adviser is producing attractive returns at reasonable cost.

The following pitfalls of poor advisers could set your retirement plans back by many years. Pay heed and avoid where possible.

7 Bad Habits of A Lousy Adviser

1. Frequent portfolio changes.

Once you have the right asset allocation, it should work in good and bad markets with little changes except for periodic rebalancing. There should be no wholesale changes unless the adviser is more concerned about his own pocket.

2. Pressure to invest in new products.

Be wary of advisers who pressure you to buy new fancy products. Such products usually lack track record and have high hidden costs. Best to stick with proven managed products with suitable risk-reward instead of shooting for the next star mutual fund or stocks.

3. Aggressive trading.

Excessive trading comes at your expense. End of the day, remember you are paying for the high trading, product and account costs. Also, few professional managers trade well enough to beat a benchmark. Chasing returns with leverage is a faster way to delay your retirement if things go wrong.

The richest investor, Warren Buffett, is not "smart enough" to time the market. Hence, neither should your financial adviser who has to depend on commissions for a living.

4. No return calculations.

You can't tell if you are getting value if the real return you are getting is omitted or buried under complex language.

5. Frequent capital losses.

Obviously, this is not sustainable if your portfolio keeps shrinking under your adviser's charge. When you are constantly selling at a loss, your portfolio has the wrong or risky products and the asset allocation needs to be changed.

6. Too much contact.

Advisers call you rarely to socialize or help out with your house chores. They are mostly to generate commissions, like recommending hot stock or churning products. Such practice can reduce your returns by up to 80%.

7. No contact

This is definitely much safer than too much contact, but it is not a small sum to pay especially when your portfolio is huge. You will be better off relying on yourself by being a long-term value investor.

It is not too late to make changes and get your retirement plan back on track. To ensure that the relationship with your adviser stays healthy, ask for for return calculations.

Then compare with a relevant benchmark and see if your annual costs are too high. If the returns are much lower than the benchmark, and the adviser refuses to change his wayward management, do it yourself or get a new adviser.