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Published on August 8th, 2012 | by Jack Waymire

How Can I Increase My Advisor’s Accountability for Investment Performance?

Every investor who relies on financial advisors to help them achieve their financial goals should be asking themselves how they can increase their advisor’s accountability for investment performance. Why ask the question? Most advisors go to great lengths to avoid accountability.

Here is an example. You select an advisor who convinces you to invest your assets in five mutual funds. You buy the recommended investments and you experience very poor performance over the next two years. Who is responsible for the bad performance, the funds or the advisor who recommended the funds? The advisor wants you to blame the funds so he can retain his relationship with you. He says it is not his fault the funds failed to deliver competitive performance. I disagree. The funds and the advisor who recommended them are both accountable. You should sell the funds and terminate your relationship with the advisor who sold you the funds. 

Increased advisor accountability starts with you. You have to be willing to take the time to put your performance expectations in writing and the advisor has to agree in writing that your performance requirements are realistic and achievable. Now the advisor is accountable and you have a tool for measuring his results.

Why a written document? Performance is too important a topic to rely on verbal communications. There is no misinterpretation or misunderstandings if your requirements and the advisor’s response are in writing.

Next, you need a report system that monitors the performance of your assets. Your advisor will provide a brokerage statement that documents your holdings, dividend and interest income, and transactions. You also need a report that documents your performance before and after the deduction of all expenses. Your advisor should not control this report – the potential conflicts of interest are too great. The report you depend on should come from an independent third party who does not benefit financially from your decisions.

Last, you need a realistic benchmark that contains multiple asset classes and uses allocation to reflect your tolerance for risk. The benchmark is your tool for determining your advisor’s relative performance. Based on the agreement with your advisor, he is accountable for outperforming your benchmark.

If you are not inclined to develop your own tools, you can use free tools you will find on the www.InvestorWatchdog.com website.

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About the Author

worked in the financial services industry for 28 years. For 21 years he was the president and chief investment officer of a registered investment advisory firm with more than 50,000 clients. He left the industry in 2003 when his book (Who's Watching Your Money?) was published by John Wiley. That same year he launched an investor information website (www.PaladinRegistry.com) that was based on the principles in his book. Jack is a columnist for Worth magazine, a frequent blogger on major financial sites, and widely quoted in the media including the Wall Street Journal, Forbes, BusinessWeek, Bloomberg, and Kiplinger.



2 Responses to How Can I Increase My Advisor’s Accountability for Investment Performance?

  1. Pingback: Investor Apathy Creates Major Financial RisksPaladin Registry Blog

  2. Samuel Yan says:

    Jack,

    It’s a surprise to find your website today and read through a lot of your posts so far. I talked to many advisors and ask them to produce some charts like the ones I have on my site. None of them can. But all of them are interested in portfolio performance. Most of them just worry about regulatory issues to use any tools like mine. That’s too bad.

    I am still reading your article and how we can connect in someway.

    -Sam

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