When Should You Fire Your Financial Advisor?

I was recently reading an article about when clients should fire their financial advisor. The article highlighted the expected responses about poor performance or poor response time to questions or needs. Not once did the article touch on the number one question our clients want answered which is… “When can I retire?”

You don't want to fall into retirement with a prayer that your money will last. You want to retire when you want to and how you want to armed with the confidence that your style of living can go with you. Does performance or volatility play into this? Of course. But there are two sides to retirement planning and they are both equally important.

“Retire when you want to and how you want to”

Have a Retirement Plan...and Update it!

A big sales pitch in firms is to offer you a complimentary retirement plan which will be presented to you in a fancy leather-bound folder. An excellent snapshot of where you are today and where you want to be. Unfortunately, the plan wears out quicker than the leather binding it together as your financial picture is changing daily.

If your financial advisor isn't reviewing your retirement plan and updating it with you on an annual basis then bring down the axe on that relationship. Plans that are five years old or more are nothing more than a paper weight.

Execute the Plan! Here is the tricky part for clients in interpreting how good their advisor is at executing their retirement plan. It is normal to experience some form of market volatility on a regular basis that could hamper your retirement dreams.

Our firm prefers to use tactical strategies for clients approaching retirement because of their past history in providing some downside protection during severe bear markets. You can learn more about our tactical strategies here.

A bad year can force you into a position to take on more risk than you want because 

you must make up for losses.

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How much risk are you taking?

Asset allocation strategies can work as well as you approach retirement because your advisor can adjust the investment holdings to reduce the volatility of the portfolio. The easiest way to understand your expected returns is to think back to the trusty bell curve.

Your advisor is giving you some type of performance report that likely has a standard deviation number. Ideally I would like to look at the one-year standard deviation because then I can make adjustments for recent trends if necessary.

Take this bell curve as an example:

The one standard deviation is 5.89% so 68% of the time you should expect your performance to be +/- 5.89%.

Two standard deviations is 13.02% so 98% of the time your performance will be +/- 13.02%.

If you look at these numbers and say, "Gosh I want to be able to make 30% in a great year for the market" then you're going to be disappointed because your portfolio isn't built to give you 30% returns. If you look at these numbers and say, "Gosh I would have a heart attack if my portfolio went down more than 10%" then your portfolio needs to be tightened up into a smaller range.

So how does understanding this help your advisor execute your plan? Your retirement plan will have certain assumptions as to what kind of returns you need to reach your retirement goals and sleep comfortably. If you have amassed a huge savings and are a thrifty spender then you likely don't need 12% annualized returns to reach your goals. You may only need 4-5%. So if your plan needs 4-5% annualized return then your advisor should not have you in an allocation that is trying to get 12%. A bad year (which is more possible with a riskier allocation) can force you into a position to take on more risk than you want because you must make up for losses.

These are important conversations to have with your advisor. I once was told by an advisor who had been in the business for many years that clients don't understand this language. My response was "That's our fault, and it's a mistake we should stop making." Changing from the mindset of saving all you can for retirement to spending your life savings is scary enough. Flipping that emotional switch and not having the right team around you to explain the market or answer your financial questions is more than anyone should have to handle.

Questions?Give us a call or email:

Matt AhrensAssociate Financial Advisor

mahrens@integrity-advisory.com913-897-2074

www.integrity-advisory.com