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Breakups are always hard.
The relationship with your financial advisor is no different. But there are some telltale signs it’s probably time to call it quits, experts say.
“When it comes down to it, it’s a business relationship,” said Micah Hauptman, director of investor protection at the Consumer Federation of America, an advocacy group.
“If advisors are not serving the client in a way the client deserves or expects, it’s entirely appropriate to end the relationship,” he said.
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Statistics vary on how many people use a financial advisor.
About 17% manage their money with the help of an advisor, according to one 2019 CNBC survey. A poll conducted last year by Northwestern Mutual found that the share jumped during the Covid pandemic, to 35%.
But only 6% of clients ever fire an advisor — which suggests doing so is a “relatively rare occurrence,” according to a new Morningstar study.
Here are three situations when it may make sense to part ways.
1. The advisor doesn’t care about your goals
Most investors who fired their advisor cite poor quality of financial advice and services or poor quality of relationship as primary drivers of their breakup, according to Morningstar.
Indeed, 53% of individuals said these reasons accounted for their decision.
In other words, it’s largely not lackluster financial returns that people care about, said Danielle Labotka, a behavioral scientist at Morningstar and a co-author of the report.
Instead, issues might arise if an advisor doesn’t devote enough time to understanding who their client is as a person or their personal financial needs and goals.
Ultimately, a client’s money — whether retirement savings or otherwise — is earmarked to help investors live their best possible lives.
“You want to work with advisor doing some digging around those goals,” Labotka said. “You might not have thought about that much as an investor. What are my deep goals here?”
2. The advisor charges a lot for what they do
Of course, some investors may not expect (or want) that level of service.
They may be on the hunt for maximized investment returns without much regard for broad financial planning that accounts for cash flow, taxes, estate and long-term planning, for example.
But cost is important to consider no matter the service involved.
Cost is the No. 3 most frequently cited motivator for firing an advisor, behind lackluster quality of advice and relationship, Morningstar found.
“If they’re charging 1% [a year] and all they’re doing is portfolio management, that should raise some red flags,” Hauptman said.
The way I like to frame it is, look at costs and quality.
Micah Hauptman
director of investor protection at the Consumer Federation of America
Advisory fees are often (though not always) expressed as an annual percentage of a client’s assets. A 1% fee on $100,000 equates to $1,000 a year, for example.
Here’s the somewhat difficult thing: fees are subjective.
While a 1% annual fee is generally high for investment management services, you may feel the advisor’s effort is worth it. The same logic applies across the range of advice services.
“The way I like to frame it is, look at costs and quality,” Hauptman said.
Clients should figure out what their annual fees are in dollar terms (not percentages) and decide if it’s worth it to them. Or, they can ask the advisor what their dollar fees are — and it’s a red flag if they’re hesitant to answer, Hauptman said.
3. The advisor is a lousy communicator
Let’s face it, finance can be confusing — and it’s part of an advisor’s job to explain concepts and strategies simply to their clients, according to Labotka.
“If everybody knew it all, we wouldn’t need financial advisors,” she said.
“Ensuring you have someone who will have those conversations with you — who’ll take the time to walk through the changes they want to make to your [financial] plan and why is an important source of value,” Labotka added.
Bad communication may also erode a client’s trust in their advisor, Hauptman said.
Do they communicate when they say they’ll do so? Are they out of touch for long periods of time? Do they do things they promised, or that you want and expect? Are they recommending things you don’t understand and are unable to explain in simple terms? Hauptman asked.