On more than a few occasions over the years someone on the other side of my desk said they were unhappy with their financial adviser and asked what I thought of their portfolio.
I’m always glad to oblige. Usually, the stocks, funds and income vehicles were not ones I recommend. That’s to be expected. There are tens of thousands of issues, and opinions differ.
Fine. But now and then I would see positions or asset classes that should make a client wonder about his adviser. Among them:
There are thousands of ETFs and no-load mutual funds, but many that have a sales charge (as much as 8 percent) either on the front end or back end. Some advisers recommend load funds even though there are better-performing ETFs or no-load equivalents. If an adviser recommends a load fund, find one who doesn’t.
Annuities are insurance products, all of which have commissions that can be as much as 6 percent and high annual expenses. They also have surrender charges that gradually diminish until they disappear after six or seven years.
Putting an annuity inside an IRA is tantamount to opening an umbrella indoors, but if a client only has a tax-deferred account, some advisers will recommend doing so. If your adviser recommends an annuity, then we have a differing opinion. If he recommends an annuity for an IRA, however, shame on him.
While most advisers recommend a diversified portfolio, too much of a good thing is ... well, too much. If your adviser recommends 50 or 100 positions, you would be better served buying a Vanguard Total Market Index fund.
I’ve seen portfolios with so many stocks that even if one doubled or tripled it would have a negligible economic impact.
Perhaps most important is an adviser’s fee. The industry standard for stock accounts is about 1 percent of assets annually and larger accounts pay less.
But there are advisers that charge 2 percent, some even more. Others reap commissions from load funds and other products they sell.
Consider this: Over the long term stocks have returned about 10 percent annually. If an adviser is charging 2 percent, that’s one-fifth of the market’s return. And that is assuming he is at least matching the market. Most do not.
Bottom line: Take a close look at your portfolio. Is your adviser acting in your best interest ... or his?
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.