By Michael Chamberlain, CFP, AIF
“Do I need a second opinion on my investments?”
This is a simple question, and for most investors, the answer is yes. Most investors don’t completely understand their holdings, because most advisors aren’t providing their clients the information they need to understand what they own. If this is true in your case, you should have another advisor or portfolio manager review your investments.
To decide whether you need to get another opinion, ask yourself whether you would agree with the following statements about your portfolio.
I have a written plan for my investments
If you don’t have a plan, how do you know where you’re going, how you’re doing in getting there, when you’re off course, and when changes need to be made? A written investment policy statement, or IPS, outlines the asset allocation of your portfolio, identifies the benchmark by which to judge how your portfolio is doing, and includes guidelines on when the portfolio should be rebalanced. Your IPS should change over time as your goals change.
I know that my portfolio is tax-efficient
Most of the new client portfolios that we review are not as tax-efficient as they should be. Tax efficiency depends on the type of investments held in various accounts, the tax reporting methodologies used and the application of tax-loss harvesting. Whenever you’re paying more in taxes than necessary, there’s less in your account for you to use now and in the future.
I understand the level of risk in my portfolio
Generally, the level of risk can be gauged by the percentage of the portfolio that’s made up of equities (stocks and funds owing stocks) versus fixed income investments (cash and bonds). A greater proportion of equities translates into more risk or volatility. Of course, the equity sector can be subdivided into multiple categories — large and small companies, foreign and domestic, growth versus value — and each has its own corresponding risk. Varying risks also exist in the fixed-income arena.
I know that the level of risk is appropriate for my situation
As people get closer to retirement, their level of risk should decrease. Unfortunately, without proper advice, many individuals approaching retirement have the same level of risk in their portfolio that they had 20 years ago. A big change in the market could smash their nest eggs.
I understand all expenses associated with my portfolio
No matter what investments are in your portfolio, there will be expenses involved. The lower the expenses, the more money stays in your account. Research firm Morningstar has indicated that one of the best predictors of mutual fund performance is cost. The lower the cost, the better the performance.
Fees can include the expense ratio of the mutual fund or ETF; account fees; advisory fees; 12 B-1 fees; transaction charges; mortality and expense fees on a variable annuity; termination fees; and commissions. Investors should be able to identify all of the fees on their accounts and know the reason for each of them.
I understand whether investment advice is ‘fiduciary’ advice
Investment advice falls under two legal standards. The “fiduciary standard” is the highest level of protection and means an advisor must always keep the interests of the client ahead of what might be best for the advisor and his or her firm.
I understand whether investment advice received is ‘suitability’ advice
The “suitability standard” merely requires that an advisor’s recommendations be reasonable for the investor’s circumstances. Under this standard, the representative can provide something other than what is best for the client, allowing conflicts of interest to arise.
I understand the method to evaluate investments in my portfolio
It is best to have a repeatable process by which investments are selected and retained. Unfortunately, too many people make decisions based on past performance. The Securities and Exchange Commission clearly states that past performance is not a good indication of future performance. Therefore, there must be another methodology by which to judge investments — and you should understand how that methodology works.
If you agreed with all of the above statements, you do not need someone else to review your investments. Congratulations! You are in a very small minority of investors.
If you agreed with only three or four of the statements, you are more familiar with your portfolio than the average investor, but you should still have someone take a look. And if you didn’t agree with any of them, don’t worry — you are quite normal, but you will definitely need to get a second opinion on your investments.
Most investors should get a second opinion. If these crucial areas of your investment strategy or portfolio management are unclear, you may need to do a bit of digging. Getting another review of your portfolio can help you better understand it, identify ways to improve its performance and possibly lower the taxes you pay on it.
But where you get that second opinion is important. It’s best to work with a fee-only certified financial planner and who does not sell products. To find such an advisor near you, check out the Garrett Planning Network or the National Association of Personal Financial Advisors.
Mike Chamberlain is a certified financial planner at Chamberlain Financial Planning & Wealth Management.