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As you get around to opening your Q1 brokerage statement, take a breath, and remember: don&a;rsquo;t judge&a;nbsp;somebody (especially your financial advisor) until you have walked a mile in&a;nbsp;his or her shoes. It&a;rsquo;s easy to judge the actions of others&a;nbsp;in hindsight and opine on sub-optimal outcomes when we are not responsible for making decisions ourselves.
Money management is not easy. Contrary to what most people think, the hard part is not coming up with the initial asset allocation or determining what to buy. There are countless tools to help&a;nbsp;advisors and individual investors allocate to stock and bond funds. The tricky part of managing your own money is avoiding behavioral traps that lead to poor decision making.&a;nbsp; The toughest aspect of managing somebody else&a;rsquo;s money, which is the job of your financial&a;nbsp;advisors, is dealing with emotional clients who want to make those very same mistakes. So when you open those statements and make a list of things to discuss with your advisor,&a;nbsp;leave these three&a;nbsp;questions unasked:
&l;/p&g;&l;ol&g;&l;li&g;&l;strong&g;Why did my portfolio return less than the S&a;amp;P 500?&l;/strong&g;&l;/li&g;
If the S&a;amp;P 500 was the predetermined benchmark when you opened up your account, then you might have a legitimate gripe. More likely, you discussed the benefits of a diversified portfolio of stocks and bonds and&a;nbsp;a target income from your investments. You might have even completed a detailed questionnaire to assess your risk tolerance to corroborate the results. Most investors have a lower tolerance for risk than one consisting of 100% equity exposure. If you did not beat the S&a;amp;P in an up-market, it is probably because you are taking less risk. The next bear market will drive that point home. Your portfolio was not designed to beat the S&a;amp;P- it was created to meet your personal needs.
&l;ol start=&q;2&q;&g;&l;li&g;&l;strong&g;Why is my neighbor&a;rsquo;s advisor crushing it for his clients?&l;/strong&g;&l;/li&g;
First, your neighbor is probably lying. If not lying, at least exaggerating.&a;nbsp; Second, he might have a completely different risk tolerance and asset allocation. Your advisor sets the portfolio mix and the market determines your return. Asset allocation is the largest component of your total return. There are two exceptions to this rule. First, if your advisor has allocated the bulk of your assets to mutual funds with high expense ratios, you are likely to underperform your chosen benchmarks over the long-term. Low-cost ETFs and mutual funds will better track the market return. If the reason for your neighbor&a;rsquo;s better performance is due to lower fees, then the right question you should be asking is &a;ldquo;Why am I in high-cost funds (or with a high fee advisor) when I can get the same exposure with a low-cost alternative?&a;rdquo; Second, some advisors run very concentrated (ie. not diversified) equity portfolios.&a;nbsp;In this case, your performance will be driven by your advisor&s;s ability to pick individual stocks. If your neighbor is crushing it because his advisor has loaded up on a few high-growth stocks, remember the pitfalls of such a strategy: you are taking on significantly more risk and potential downside when you don&s;t diversify. Comparing your returns to others, without a comparison of the risks, is something that will make your advisor&s;s eyes roll.
&l;ol start=&q;3&q;&g;&l;li&g;&l;strong&g;Why can&a;rsquo;t you generate a decent income from bonds?&l;/strong&g;&l;/li&g;
I have bad news for you. Your advisor does not control interest rates. The Federal Reserve controls that task. Risk-free rates are low by historical standards. Higher yields are available other segments of the market, like junk bonds, but you are taking on a lot more risk to get that yield. Moreover, junk bond yields are very sensitive to the economic cycle, just like equities. So when your stock portfolio is going through rough times, chances are your junk bonds are, too.&a;nbsp; Over the last few years, some advisors have turned to stock dividends as a source of income. &q;Bond alternatives&q;, as some people refer to them, may pay more than bonds, but they are much more volatile when markets turn sour. If you want safety and predictable income, you need to stay with investment grade bonds. Unfortunately, they don&a;rsquo;t offer much return at the moment. It&s;s not your advisor&s;s fault.
Financial advisors have many responsibilities.&a;nbsp;Beating the market, taking excessive risk, or controlling interest rates,&a;nbsp;are not among them.&a;nbsp;Advisors are there to educate, coach and support you through the ups and downs of the market. Their job is to create a long-term asset allocation strategy consistent with your goals and to do everything possible to avoid deviating from that plan (unless the goals change, of course). Success is measured in years, not in months.
Just like any industry, the financial advisor community contains both studs and duds. Not everyone is entirely qualified or capable. You may have an incompetent advisor, in which case, it&a;rsquo;s time to switch. The bads ones &l;a href=&q;https://www.forbes.com/sites/lawrencelight/2015/09/13/how-to-spot-a-bad-financial-advisor/#150d45d74ee2&q;&g;usually carry similar traits&l;/a&g;. If you see these traits, then, by all means, start asking questions. But not the ones listed above. It&a;rsquo;s better to ask them about their investment philosophy, where they received their training, or how they are compensated. Alternatively, you can try to do it all yourself. You might find that tackling the markets and your emotions every day is not as easy as it appears.