Should I fire my financial advisor?

[Grinch80]

So I met with my financial advisor today for our annual account review and I was surprised by the poor performance of my portfolio. Since I have a long-term horizon (13-25 years), I don't track things closely but perhaps I need to in the future.

My portfolio:

IRA: 40% US equities, 30% Int'l equities, 30% bonds. Underperformed S&P 500 by 9% in the last year (June 2011-May 2012).

401K: 45% US equities, 30% Int'l equities, 25% bonds. Underperformed S&P 500 by 11% in the last year (June 2011-May 2012).

529: 50% US equities, 45% Int'l equities, 5% bonds. Underperformed S&P 500 by 10% in the last year (June 2011-May 2012).

Based on our meeting, we're going to reduce bonds in the IRA and 401K accounts to approx 20%, and there are a few funds that are underperforming which we will replace.

But I asked my advisor the simple question: Why not just tie my portfolio to a broad S&P 500 index? He gave me a cogent answer around portfolio diversification and risk, the European mess, T-bill yields near all-time lows, and most importantly, be patient and remember my long-term 13-25 year outlook.

So, should I heed my advisor's advice or look to replace him?

Thank you.

[kork13]

How closely have you looked into the fees for all of your investments? Front-end loads, high expense ratios, and so on? Also, how is your "advisor" compensated?

My initial impression is that you don't have a financial advisor... you have a financial salesman. He's probably got you in over-expensive investments that give him a kickback (commission) for getting you to invest in them. The fact that he cites current issues of the day as a reason to shape long-term goals (and the fact that his thoughts on them are not performing for you) is a strong sign that he doesn't know what he's talking about.

Bottom line: he's probably bilking you. I'd drop him like a hot rock. You're paying him to provide you with smart investment advice that achieves your goals. He's obviously not doing that, so give him the boot. If you're willing to do some reading to educate yourself a bit, you can probably do better than he's doing for you without the exorbitant cost of his bloodsucking--I mean, his "services".

[Petunia 100]

So I met with my financial advisor today for our annual account review and I was surprised by the poor performance of my portfolio. Since I have a long-term horizon (13-25 years), I don't track things closely but perhaps I need to in the future.

My portfolio:

IRA: 40% US equities, 30% Int'l equities, 30% bonds. Underperformed S&P 500 by 9% in the last year (June 2011-May 2012).

401K: 45% US equities, 30% Int'l equities, 25% bonds. Underperformed S&P 500 by 11% in the last year (June 2011-May 2012).

529: 50% US equities, 45% Int'l equities, 5% bonds. Underperformed S&P 500 by 10% in the last year (June 2011-May 2012).

Based on our meeting, we're going to reduce bonds in the IRA and 401K accounts to approx 20%, and there are a few funds that are underperforming which we will replace.

But I asked my advisor the simple question: Why not just tie my portfolio to a broad S&P 500 index? He gave me a cogent answer around portfolio diversification and risk, the European mess, T-bill yields near all-time lows, and most importantly, be patient and remember my long-term 13-25 year outlook.

So, should I heed my advisor's advice or look to replace him?

Thank you.

Personally, I feel that a portfolio of low-cost index funds, reasonably allocated, and re-balanced periodically is far, far superior to anything any advisor will put together for you.

If by "replace him" you mean "find another advisor", you may as well just keep him. If by "replace him" you mean "I am done paying high fees in an attempt to beat the market" then yes, definately continue down that path.

[jpg7n16]

But I asked my advisor the simple question: Why not just tie my portfolio to a broad S&P 500 index?

Because you would be pissed off at him when the domestic market goes down and bonds and internationals go up. Also because 100% stocks is too much risk.

I mean, over the past 5 years, bonds are up around 14% and stocks are down around 13%, so why not just have 100% bonds instead?

If you look at one index at a time, over one timeframe, you'll want 100% stocks, and over another you'll want 100% bonds, but you can't have both. So what is your advisor supposed to do? Give a portion of each.


The issue with what you are trying to do is you're comparing things that aren't directly comparable. Your portfolio will not move directly with the S&P500, because only a portion of it is tied to that. A better comparison would be to compare against a similarly structured index.

Over the past year - Google info, June 10, 2011 to May 30, 2012
Domestic Stocks: S&P 500 - symbol SPY (+1.02%)
International Stocks: Vanguard Total International Stock Index - symbol VTIAX (-22.08%)
Bonds: Barclays Aggregate Bond Index (AGG) (+3.67%)

Assign the appropriate percentages and your expected return is around:
IRA: -5.115% underperformed by 6.135%
401k: -5.2475% underperformed by 6.2675%
529: -9.2425% underperformed by 10.2625%

So in all, looks like the 529 was around what you'd expect, and the other accounts did a bit worse than expected, but it's not as bad as you believe it was.


Find an appropriate benchmark and compare to that, not to the S&P 500.
Index Returns

The aggressive target risk lost -0.17%, compared to the S&P 500 which made 9.17% this year.

He gave me a cogent answer around portfolio diversification and risk, the European mess, T-bill yields near all-time lows, and most importantly, be patient and remember my long-term 13-25 year outlook.

So, should I heed my advisor's advice or look to replace him?

Thank you.

Actually his info is spot on. You have international stocks which were affected by the European mess. You have a bond portion of your account which is hampered by all time low yields.

You do not have a 100% domestic stock portfolio, so don't compare it to a 100% domestic stock index.

As to why you should not be in a 100% stock portfolio, please research asset allocation. There is ample evidence that you can significantly reduce volatility without significantly reducing returns by adding additional asset classes.

Furthermore, it doesn't make sense to compare a portfolio designed for 20 years, and make decisions based on a 1 year period.

[dczech09]

JPG brought up an excellent point. You are basically trying to compare apples and oranges.

What I would do is this:
1) Look at the fees and commissions you are paying- are they really high? If so, they may be eroding your investment returns
2) Consider whether or not you could find a better advisor
3) Consider handling everything yourself
4) If you decide to switch advisors, keep your current one until you find a new one you like

I personally think your allocations were a tad too light on equities, but that is just my opinion.

Outperforming the S&P 500 consistently is tough. If you or your advisor could do it consisently, you would not be doing what you're currently doing for a living

[Grinch80]

Everyone, thanks for your responses and perspectives. Much appreciated. I have a lot to think about.

[disneysteve]

Outperforming the S&P 500 consistently is tough.

I'd go as far as to say that consistently outperforming the broad market is nearly impossible. With the exception of Warren Buffet and maybe a select few others, virtually nobody outperforms the market in the long run. Some funds or ETFs or managers will do it for short stretches of time but not over 10 or 20 years.

[dczech09]

I'd go as far as to say that consistently outperforming the broad market is nearly impossible. With the exception of Warren Buffet and maybe a select few others, virtually nobody outperforms the market in the long run. Some funds or ETFs or managers will do it for short stretches of time but not over 10 or 20 years.

If I could do it, I sure as heck would not be on this forum

[Gina23]

I dumped my advisor about a year ago and haven't missed it. There is so much information out there about how to manage your money through low cost index funds. Once I saw how much I was paying in fees I realized over the long term how much that were going to effect my investments.

[Nika]

But I asked my advisor the simple question: Why not just tie my portfolio to a broad S&P 500 index?

If you want to put it into S&P500, why would you need an advisor to handle it?

[scubatim84]

If you want to put it into S&P500, why would you need an advisor to handle it?

Precisely. Not only will you have a nice, low-cost fund which captures your entire US domestic stock portfolio in one neat little fund, but you can jettison your advisor and cut down on expenses there. Win win.

Personally, I feel that a portfolio of low-cost index funds, reasonably allocated, and re-balanced periodically is far, far superior to anything any advisor will put together for you.

If by "replace him" you mean "find another advisor", you may as well just keep him. If by "replace him" you mean "I am done paying high fees in an attempt to beat the market" then yes, definately continue down that path.

Agreed. As others have pointed out, you don't want a 100% stock portfolio, so obviously your portfolio, being not 100% stocks, will trail or beat the S&P 500 here and there. That being said, especially with a long investment horizon, 75-80% of your portfolio WILL be in stocks and SHOULD be in an index fund. Whether it's on the S&P 500 or the Wilshire 5000, just dump it in a low-cost index fund like Vanguard 500 or Vanguard Total Stock Market and be done with it. Sure, you should still have bonds and maybe some international, but just index those too. Low-cost funds are even more important for bonds anyway, since the return is a lot lower than stocks in most cases.