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A financial adviser has been managing about $400,000 in assets in mutual funds and a few stocks for me since 2001 for a fee of 1 percent of assets per year.
I've paid more than $16,000, but am beginning to question whether to keep working with this adviser since my assets have increased by only 1 percent over the past 4 years. Any advice?
-- Anonymous, Minneapolis, Minn.
The first thing you've got to keep in mind is that the most important way of measuring how well or badly an adviser's investment recommendations for funds and stocks have turned out isn't just whether you made or lost money. It's how well you did versus some appropriate benchmark.
After all, if you have an all-stock portfolio and the market is down, say, 20 percent, and you lost 10 percent, the adviser has done a pretty decent job for you even though you might not be happy with a 10 percent loss.
Similarly, if your stock portfolio is up 10 percent, but the market overall is up 20 percent, then maybe your adviser's advice wasn't so hot.
Compare apples to apples
The question is, what's an appropriate benchmark? Well, for the stock portion of your portfolio, you're usually best off using a broad index that reflects the make-up of the entire U.S. stock market -- something like the Dow Jones Wilshire 5000 or the Russell 3000 -- but the Standard & Poor's 500-stock index is a reasonable proxy as well.
If you also own bonds or bond funds, then you want to use a bond index to assess the performance of that part of your portfolio.
Something like the Lehman Brothers Aggregate Bond index should do. Or you could simply gauge bond returns by going to the Funds section on Morningstar and checking out the returns for a bond index fund such as the Vanguard Total Bond Market Fund.
If you own a combination of stocks (or stock funds) or bonds (or bond funds), then you can calculate a blended return, say, 60 percent of the stock return and 40 percent of the bond return, if that's how your portfolio is divvied up.
Are your getting value for your money?
With this information in hand, you can begin to get a better idea of whether your adviser is giving you value for your money.
So let's take a quick look at your case. You say your portfolio's value is up 1 percent since 2001 after paying $16,000 in fees. Well, if your portfolio was invested entirely in stocks during that time, then it doesn't seem you've done too badly.
Even though stocks had a good year last year and have been about flat so far this year, stocks still have lost just over 11 percent from the beginning of 2001 through the end of August. That's because of their dismal showing in 2001 (a 12 percent loss) and 2002 (a 22 percent decline).
So being up 1 percent over that period in an all-stock portfolio doesn't seem too bad, especially if that $16,000 in fees was deducted from your holdings. (I'm assuming, of course, that, other than the fees, you didn't pull money out of your portfolio or put new money in.)
If, on the other hand, your portfolio was invested entirely in bond funds, then a 1 percent gain over that period would look pretty lousy.
Bonds overall were up just under 30 percent over that period. So even if that 16 grand in fees were deducted from your holdings, a bond portfolio should have been up much more than 1 percent.
I don't know what the stocks-bond breakdown is in your portfolio. But you can find that out by plugging your holdings into theInstant X-ray calculator at the T. Rowe Price Web site, which will look at the underlying holdings of your funds and tell you what percentage are in stocks (and which sectors) and bonds.
Once you know the breakdown, you can approximate the return your portfolio would have earned had it been in broad market indices -- and you can see whether your adviser added value.
Update your portfolio regularly
While I think it's a good idea to go through the exercise I just described, I also think it makes sense to simply get together with your adviser and say you'd like an update on how your portfolio is doing.
For the amount of money you're paying, I would expect the adviser to provide at least some sort of an update on a quarterly basis and a much more comprehensive one annually.
The quarterly update should evaluate your portfolio's performance vs. one or more benchmarks, perhaps specific benchmarks for individual sectors of the portfolio and then some sort of benchmark for the portfolio overall.
Keep in mind that underperformance alone isn't an indictment of incompetence. It may very well be that your portfolio has underperformed the standard benchmarks because your adviser is purposely investing your money extremely conservatively in response to your wish to preserve capital. Obviously, you'll have to take your risk tolerance into account when assessing performance.
Finally, I would think your annual review would also include not just a look at the portfolio's performance, but some sort of analysis of how the portfolio fits into your goals: is it growing enough to pay a child's tuition, or support you in retirement, or what sort of annual income can it reasonably generate in once you retire, that sort of thing.
If you're not getting these types of updates and analysis -- and if the performance is no hot stuff -- then you have to wonder why you're forking over 1 percent of assets year after year.
If that's what you're wondering at the end of this evaluation process, then perhaps you ought to consider moving to another adviser, in which case you may want to take a look at an earlier column I did on choosing someone to help manage your money affairs.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."