You’re Fired! Why It’s Important to Ask Why You Hire a Financial Advisor, Not Just How

You're Fired

Kevin Noblet is not a household name, but he quickly gained some fame in financial advisory circles after his article about why he fired his financial adviser after just 9 months ran in the August, 29t, 2014 edition of the Wall Street Journal.

Clients fire advisers all the time, so this wouldn’t seem like news. But Noblet isn’t just any client. He happens to be an editor responsible for coverage of the wealth-management industry at the Journal, which is why his article made it into a number of industry commentators’ Twitter feeds and “must read” lists that weekend.

Without retelling the entire article, Noblet and his wife hired an advisor they liked after asking “lots of questions,” with the belief that professional management could help obtain a better return in lesser known asset classes and that the advisor could help pick better active stock-fund managers.

Noblet quickly became disenchanted when his new advisor sold all of his and his wife’s existing holdings, ignoring any tax implications. Things didn’t get any better when the advisor replaced his old mutual funds with new ones with much higher expenses (some exceeding 2%), started making a lot of short-term trades (many at a loss), and attempted to time the market by using products that were intended to rise in value when the market dropped. After just one meeting in the 9-month period, Noblet fired his advisor and resumed managing his own money.

Frankly, I would be disenchanted too. There are some great lessons to be learned from this story. Noblet deserves praise for publically sharing what he admittedly calls an embarrassing situation, in that his background knowledge of the profession should have given him a better understanding in how to pick an advisor. That said, and without trying to blame the victim, there were clearly some things that should have been asked and questioned, starting with why Noblet felt an advisor was necessary in the first place.

Just because financial advisors may eat, sleep and drink financial news does NOT mean that they are any better at picking “winning” actively managed mutual funds than a retail investor. Moreover, clients who seek advisors for the sole purpose of getting better investment returns will likely be disappointed at some point. When that investment performance fails to materialize, the client is faced with a tricky decision: is the advisor suddenly bad at his or her job?

Instead, a relationship with an advisor should be based on working with someone who can help you make smart financial decisions about the entirety of your financial life, not just your investment portfolio. What’s more, an advisor’s success should be based on his or her ability to prevent you from succumbing to emotionally driven, self-inflicted wounds, like selling all of your stocks after a 20% market drop. That’s a lot different than trying to eke out an extra few tenths of a percent of investment gains.

If you are considering working with an advisor and you have taxable accounts with built-in gains, it’s critical that you ask your advisor how they’re going to handle things. The policy of some firms is that all portfolios must resemble the firms’ models, regardless of the tax consequences of actually making that happen. At Woodward Financial Advisors, we take a much more flexible approach. We will often build around positions with embedded gains to get to our desired allocation as best we can. We also use tax losses to our advantage to balance gains resulting from the sale of less desirable holdings, as well as family and charitable gifting to further reduce those positions.

Prospective clients might not need to know all of an advisor’s investment philosophy before signing on, but it would probably be a good idea to get their thoughts on market timing, short-term trading, the costs of their preferred funds and how they react to market movements.

Lastly, one of the things Noblet mentioned in looking for an advisor was that he wanted, “…a lead advisor with experience and gray hairs, like those I have in my early 60s.”

I completely understand the thinking that people want to work with someone who has “seen it all.” But to some extent, this sounds a little bit like confusing age with wisdom. I would submit that advisors who came of age in the market environments of 2000-02 and 2008-09 may have a better perspective than advisors who did nothing but ride the incredible bull market of 1980 – 2000, despite their lack of gray hairs.[1] What’s more, if your advisor is supposed to see you through retirement, does it make sense to work with someone who is probably going to retire when you do?

Noblet’s story serves as a great primer on both why someone might choose to work with a financial advisor, as well as how someone should choose the right advisor for them. Clients and advisors would be well served to cover both questions prior to the start of any engagement.

[1] Full disclosure: I do actually have some gray hairs at the temples. But the way things are going, I’m going to have “no hairs” well before I have gray ones.

About Ben Birken

Follow me on Twitter: @WFA_Ben
This entry was posted in Current Events, Financial Planning, Firm News and tagged , , . Bookmark the permalink.