Wealth Management: Do You Need a Second Opinion?

wealth management second opinion

If you’ve got a big health decision to make, it’s common practice to get a second opinion. In fact, many insurers require it. And it makes sense; if something truly important is on the line—like your health—you can’t afford to not be thorough.

If it’s standard practice for your physical health, shouldn’t that concept also apply to your financial health?

Will Your Money Last as Long as You Do?

Especially with longevity on the rise, there are few things more important than ensuring that your money will be there for you when you need it. But if you’ve got money in the market, your risk needs to be managed, or you could be giving back gains or facing losses when the next bear market arrives.

This can be hard to imagine since we’ve been in almost a decade-long bull market. But if you think back to 2008, millions of investors saw their stock market holdings drop 20%, 30%, or even more. Even those with advisors were not immune to that sudden reminder that, yes, stock investing does involve significant risk.

Who’s Managing Your Money?

In fact, according to a study published in the Journal of Financial Therapy, 93% of financial advisors suffered from Post-Traumatic Stress Disorder after the 2008 global financial crisis. It was not easy for anyone, but those of us in the financial industry are paid to manage other people’s money. We need to be unwaveringly disciplined, and follow a system, to keep your risk in check.

Unfortunately it’s hard to tell that is happening, or in general how well your money is being managed. Or even by whom. In fact, there are surprisingly few requirements before someone can call themself a “financial advisor,” “financial planner,” or “wealth manager.” This was pointed out quite effectively in this recent article by Blair duQuesnay, who argues for the need to raise standards for financial advisors:

“The bar to hold oneself out as a financial advisor is low, shockingly low. This is all the more shocking because the stakes are so high. Clients have only one chance to save and invest for retirement. If bad advice leads to the unnecessary loss of capital, there is no time to start over.”

In this article, she also quotes another financial industry professional, Michael Kitces, who notes:

“The requirement to become a financial advisor is a 2-3-hour regulatory exam and a high school diploma. And the diploma may be optional.”

As you can see, a very low bar is set before an advisor can take the helm of your life savings. Your advisor need not take any courses on investing, spend a specific amount of time shadowing experienced money managers, or even manage a mock portfolio for a year. None of those things are required.

So it’s entirely possible that the person managing your life savings doesn’t really know what he or she is doing all that well.  It is, unfortunately, up to you to find out.

The Need for Due Diligence

As you can probably see, it is critical for you to do your due diligence before you trust your investment decisions to a financial advisor.

Unfortunately, there are few tools out there to help, but there is one: an independently verified performance report, showing the results that the financial advisor has generated for clients in the past.

Meet GIPS®, A Powerful Tool for Investors

Surprisingly, few advisors publish any type of track record. Those who do should adhere to industry best practices to make sure the reporting is trustworthy. In this case, one solution is GIPS®, or Global Investment Performance Standards. These are worldwide standards maintained by the nonprofit Chartered Financial Analyst Institute. GIPS® compliance is considered a best practice for financial firms worldwide.

Learn more about GIPS® in my previous article.

By limiting your search to the advisors who voluntarily comply with these best practice industry standards, you can truly compare apples to apples to see how each advisor has performed over time. Reporting will be net of all fees and expenses.

Equally important, since GIPS® compliance is voluntary, it shows you that the firm is committed to transparency.

Otherwise, all you have to rely upon are verbal promises to manage your money properly. Unfortunately, as we all saw in 2008, even those with advisors were usually not spared large losses.

No Cost for a Second Opinion

Fortunately, most financial advisors and wealth managers will provide a free consultation that includes a second opinion on your current holdings. So there’s no cost, just a bit of your time. In the process, you’ll probably learn something, too.

It’s also a great opportunity to find out who might be the best fit for you; different advisors may have areas of expertise in large or small portfolios, or clients with different needs, risk tolerance levels, and objectives.

Regardless, any second opinion should leave you either feeling content that your risk is being carefully managed by a firm with a good track record or allow you to interview other advisors to see who might help you best.

Sooner Rather Than Later

There’s an old market saying: “A rising tide lifts all boats.” Well, the U.S. stock market has had a very strong rising tide for more than 9 years. We’re eventually going to get a bear market, and it could come at any time.

At that point, you’ll want to be positioned carefully. That will likely mean giving up some upside in exchange for lowering your potential losses, but this is where risk management is critical. You probably don’t want to risk a very large loss to get an additional few percentage points of gain.

There’s another old saying: “Smooth seas never made a skilled sailor.” With rising markets, all financial advisors look good; you put money in, the market takes it from there, everybody’s happy. But which advisors are best prepared for when the tides eventually turn?

This is where GIPS® can help you view an individual advisor’s performance in a factual, objective manner. Otherwise, you can’t really see if your advisor can successfully navigate more difficult markets.

Of course, there’s another problem here:  you can’t assume your financial advisor has your best interests in mind.

As previously discussed, the financial industry contains many different types of professionals, some more effective than others. The problem is there is no limitation on who can call themselves an “advisor” or “wealth manager.” It may be a person who is trained in managing money and providing you with comprehensive financial advice…or it may be a person who passed a test and took some training on how to sell insurance products. Along with not having the right training or experience to help you with all your financial needs, some of these professionals may be incentivized to focus more on sales than providing true advice.

Sounds far-fetched, I know, but this is very real and all too common. An Obama White House Task Force report estimated that Americans lose $17 billion every year due to “conflicted advice.” In this case, conflicted advice means that the advisor receives commissions and has no legal requirement to put your interests first.  Instead, they are only required to recommend something “suitable”…even if that means you end up with a higher priced product simply because it pays them a bigger sales commission.

For best results, I always recommend you only consider those who are willing to act as your Fiduciary at all times. That means they are legally required to put your interests before theirs.  (Learn more about the importance of hiring only Fiduciary financial advisors in this article).

Don’t Let Your Guard Down

With a busy schedule, it is easy to get complacent and just assume everything will be okay. But especially as you get older, it’s not so easy to make losses back. If you’re in or nearing retirement, losses can impact your quality of life—in some cases, quite dramatically.

That’s why, given that we’re eventually due for another bear market, it’s smarter to act sooner rather than later.  Get a second opinion so you can either ward off problems by transitioning to a more qualified advisor, or sleep better at night knowing that your advisor is managing your money appropriately and with discipline.

 

John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a GIPS®-compliant, fee-only wealth management and financial planning firm based in Southern California and serving investors nationwide. Contact us to arrange a free, no-obligation second opinion on your portfolio.

Get a Free Second Opinion

Arroyo Investment Group, a GIPS® compliant wealth management and financial planning firm serving investors nationwide, offers a free Second Opinion service.  Simply sign up and we’ll be in touch to schedule a phone (or in-person) meeting.  Don’t worry…there’s no pressure or stream of calls afterward.  You may receive an occasional email after, but you are free to opt out at any time.

Request a Free Second Opinion