When is a Recommendation to Change a Good One? Part II

Yesterday, I wrote about being careful about just taking an advisor’s recommendation to making a change in your portfolio. Bear markets create emotional investors.
The salesperson who is acting as an advisor recognizes that emotion and uses it to make new sales. Of course, there are also the advisors who do things the right way.

The problem is that it is not easy telling the two apart, so you have to look at other factors.

If you are working with a salesperson, a change to another advisor is strongly recommended. What if you don’t know?

Let’s take a look at some situations when it makes sense to change advisor relationships.

- There is no solid professional relationship of any kind

When I say the word “relationship,” I am not talking about the type of relationship where the advisor takes you to lunch 4 times a year. I am talking about the type of relationship where you are kept informed and know that you can depend upon your advisor in any situation. An advisor who can relate to you well on a personal basis might be a good friend candidate and maybe someone that is not a good advisor candidate. Yes, the personal aspect is extremely important. At the same time, the professional relationship is vitally important. After all, all of those lunches will not help you retire one day.

- Your advisor calls you frequently with new investment ideas and recommendations

A red flag occurs when an advisor calls you frequently with different investment ideas requiring you to frequently move money around creating new fees. It has been my experience that there are very few times when it makes sense to make changes that require penalties or new fees.

- Changing advisors would mean a complete change in investment philosophy

Many times changing advisors from one to another because of investment strategy ends up being a parallel move and doesn’t create any value. Moving from one buy and hold advisor to another needs to be carefully investigated to determine the real benefit.

Moving from a buy and hold account to an account that is managed with a fee based advisor is another story. These are two totally different investment styles. The buy and hold strategy is passive and the managed investment account is actively managed for risk and reward.

The only word of caution is the definition of a fee based advisor. There are many people who set up fee based investment management accounts that charge a fee and really do nothing to earn that fee. They basically charge a fee to just buy and hold your investment account. Personally, I think that a fee based arrangement where the money is actively managed is the best strategy. At the same time, you need to make sure that the fee is creating value of some kind.

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