Should we ditch our adviser after a big loss?
One couple lost more than 60 percent of their money from investments made through their adviser. He recouped some, but should they stick with him? Our expert weighs in.
NEW YORK (Money) -- Question: We put almost all of our money in the stock market through our adviser in 2000 and we are still down! One account he manages went from more than $80,000 down to $30,000 and now it is back to $50,000.
We originally paid this adviser 1.5 percent a year, but after we complained he lowered the fee to 1 percent. We're thinking of giving him six more months to get us back to where we were in 2000, but we don't want to take our money out at a loss. What should we do? - Linda, Rutherford, N.J.
Answer: First of all, if by getting back to where you were in 2000 means you want the adviser to turn $50,000 in your account into $80,000 within the next six months, you're being totally unrealistic.
That would require a gain of 60 percent in just six months. That's not going to happen, and, in fact, you wouldn't want the adviser to try such an absurd feat. You could end up getting into in even more trouble.
Your real focus here shouldn't be getting back to where you were in 2000 but figuring out what you should be doing to make your money grow at a reasonable rate in the future.
That said, looking back should be part of your effort to re-position yourself for the future. At the very least, for example, you want to know why you took such a beating. Dropping from $80,000 to $30,000 represents a 63 percent loss, which is much more than the 50 percent or so overall decline that the stock market suffered from peak to trough in the last bear market.
So this suggests that you probably had too much of your money focused in very risky sectors of the market, perhaps in aggressive small-caps or tech stocks that seemed to promise guaranteed huge gains back in the late '90s.
While you're looking back, you also should engage in some serious self-evaluation. Back in 1999 were you, like many other investors, caught up in the euphoria of the time and thus encouraging your adviser to put you into high-octane investments? Or were you truly unaware of the loss potential? Be honest now. And while you talk of "one account" that had big losses, what about other accounts your adviser oversees? Did they perform any better?
You should be looking not just at the performance of one or two accounts but the performance of your holdings as a whole. After all, it makes sense to have investments of varying degrees of risk within a single portfolio. So it would be unfair to single out a particularly volatile investment that tanked if there were others that held up much better.
The final area you should reflect on is this: your dealings with the adviser. Ideally, when you work with an adviser you should start by talking not about investments but about you.
Before you bought a car, for example, you would first give a lot of thought to how you were going to use it. If you needed a vehicle to schlep several kids around town for soccer games, after-school activities and the like, you wouldn't buy a Corvette ragtop no matter how cool it looked. You'd probably get a minivan, SUV or station wagon.
The same goes when you're investing money. You want to have a good idea of how you're going to use the money before you decide how to invest it. What are your goals? Retirement? A college fund? When will you dip into the money you're investing? What sort of declines in the overall value of your holdings can you tolerate without giving in to the urge to sell?
The idea is that you and the adviser should arrive at an investing strategy, a long-term plan to make your money grow consistent with your goals and tolerance for risk, as opposed to just plowing your dough into whatever investments are hot at the moment.
Based on the tone of your question, I doubt such a discussion took place or, if it did, that it made much of an impression on you. Whether that's your fault or the adviser's, I don't know. Maybe you both could have done better on that score.
Okay, so after this period of self-reflection, what should you do? Well, you could go back to your current adviser, talk to him about your goals, your feelings about risk and work toward a strategy that makes sense for you and that you understand.
But, frankly, I doubt it would work out at this point. I suspect that, rightly or not, your confidence in this adviser has been irrevocably shaken and it would be too difficult to build a bond of trust. So you probably should start looking around for another adviser and this time get off to a better start along the lines I outlined above.
As to the type of adviser, you work with there are quite a few choices. If you want a portfolio that you could oversee yourself, you might go to a discount broker like Schwab or a mutual fund firm like Fidelity, Vanguard or T. Rowe Price. They have programs that can manage your investments for you or help you create a viable self-directed investment strategy by using online tools and working with a phone representative or a branch office rep.
If you need more hand-holding, you could work with a financial planner, either on an ongoing basis or as a one-shot deal. That is, you'd hire the planner on an hourly basis for help in putting together a strategy, and then you'd monitor your portfolio yourself (or pay the planner for periodic checkups). The Garrett Financial Network has a roster of planners who are willing to consult on an hourly basis.
Whichever route you take, be sure to get a detailed listing of all the fees you'll incur. In some cases, there could be several layers. For example, with a financial planner who picks mutual funds for you, you'll not only pay the annual expenses for the funds but a fee to the planner as well (typically 1 percent to 2 percent of the total value of assets the planner is overseeing).
Don't be afraid to negotiate for lower fees, however. As you've already found, advisers often can be persuaded to discount their fees.
So there are plenty of ways for you to get your investment strategy back on track. But whichever route you go, you'll increase your chances of success (and be less likely to see a repeat of your present problems) if you take some initiative at the start of the process - and then monitor your progress as you go along.
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