Should I Get a New Advisor?

March 14, 2024

Q: Not much is happening in my investment account. If my holdings rarely change, I sometimes wonder what I am paying my advisor to do. What do you think? Is it time to get a new advisor?

A: You raise a very interesting and important question. However, I’m not sure I know the exact source of your dissatisfaction. Is it the lack of transactions in your portfolio, the service you receive, or your overall investment performance? Identifying where your dissatisfaction is coming from will make it much easier to correct whatever is wrong in your advisory relationship—whether that means finding a new advisor, or helping your current advisor better meet your needs.

In 2022, Vanguard published a study analyzing how financial advisors bring value to their clients. It divides advisory services into six areas: asset allocation, behavioral coaching, investment cost reduction, portfolio rebalancing, asset location, and withdrawal strategies. Before changing advisors, try discussing each of these areas with your advisor. Find out if you are getting the value you deserve.

Asset Allocation – Asset allocation decisions are arguably the most important you will make for your investment portfolio. Your asset allocation should be driven by the timing and priority of your goals, as outlined in a well-drawn financial plan. You should formalize your asset allocation in a document called an investment policy statement, which describes how your asset allocation will be implemented and managed over time.

Behavioral Coaching – It’s been said that the financial markets are driven by the emotions of fear and greed. Unfortunately, these emotions do not usually produce strong investment performance. One of the most valuable things your advisor can do is protect you from getting tangled up in your emotions.

To better understand the value of behavioral coaching, Vanguard researchers compared how self-directed IRAs held at Vanguard performed compared to passively managed target date funds. They found that trading activity in the IRAs lagged passive markets—meaning investors bought in after the market made gains, and sold after the market had declined. Overall, active management performed worse than the benchmark indices and the more actively the IRAs were traded, the worse they performed.

These results confirm similar conclusions from various academic studies: individual investors tend to buy high and sell low. Vanguard researchers estimate that behavioral coaching may add as much as 1 to 2 percentage points to annual net return.

Investment Cost Reduction – Fees and expenses reduce your net performance. The more your advisor can reduce expenses, the better your portfolio will perform. While some markets may warrant funds with higher expenses, you are usually better off if you focus on funds with expense ratios well-below the average for funds of a similar style.

Portfolio Rebalancing – Portfolios tend to drift away from their targeted asset allocation. Periodic rebalancing brings your portfolio back in line. Although rebalancing primarily focuses on risk management, Vanguard’s researchers found that annual rebalancing can add as much as 26 basis points of risk-adjusted return compared to a portfolio allowed to drift. Ask your advisor about her rebalancing discipline.

Asset Location – Asset location, as distinguished from asset allocation discussed earlier, refers to deciding which type of account best fits a particular type of asset. For example, growth-oriented investments held for the long-term are better suited in taxable accounts, since growth in taxable accounts gets taxed at the lower long-term capital gains tax rates. Depending on your tax bracket, and the size of your taxable portfolios compared to your IRAs, asset location can add as much as 75 basis points to your net returns.

Withdrawal Strategy – The order in which you withdraw assets from your accounts can help minimize taxes and increase your portfolio longevity. This is especially true in retirement. Taxes are generally minimized if withdrawals occur in the following order:

  1. Required minimum distributions (where applicable)
  2. Interest and dividends from taxable accounts
  3. Liquidation of taxable assets
  4. Other distributions from IRAs or other tax-advantaged accounts.

If you are preparing for retirement, make sure your advisor helps you develop an optimal withdrawal strategy before you start relying on the portfolio for your support.


Please see important disclosure information here.

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com´╗┐