Choosing a financial advisor is an important step toward securing your financial future. It’s also important to periodically review your financial advisor’s performance and services, to make sure they still align with your goals. Even the best financial advisor might no longer be the right one, if your situation changes and requires different expertise.
Here’s a guide on how to evaluate the performance of your current financial advisor. While it certainly includes performance metrics like returns, those are far from the only criteria that you should consider.
Financial Performance
The first and most obvious metric is your portfolio’s performance. One of the main reasons to have a financial advisor is to grow your portfolio, after all. This is also one of the more straightforward criteria to evaluate.
Check how your portfolio’s performance compares to established benchmarks. These include both raw benchmarks and risk-adjusted ones.
Raw Benchmarks
The raw benchmark to check is the market returns. The most common benchmark (index) is the S&P 500, which is 500 of the largest public companies in the U.S. It’s usually the benchmark that’s cited when quoting how the “stock market” is doing.
Depending on your investments, however, another benchmark might be more appropriate. For stocks, you may use the Dow Jones Industrial Average, Nasdaq Composite or Russell 2000 (less common). Indices for other markets include the Bloomberg Aggregate Bond Index (bonds), Bloomberg Commodity Index (commodities), 10-Year U.S. Treasury (bonds), Barclay Currency Traders Index (currencies), and many others.
While these standard benchmarks are useful, they don’t necessarily take into account your particular risk tolerance. For those, there are risk-adjusted benchmarks.
Risk-Adjusted Ratios
Risk-adjusted ratios recognize that higher returns usually require more risk, and lower returns might be accepted if risk is reduced. These are generally most important when evaluating stock market performance, and there are two main ones:
Sharpe Ratio
Measures how much higher returns are above a benchmark, and then divides the excess returns by the portfolio’s volatility. The benchmark used for stocks is often the S&P 500.
A Sharpe Ratio of 1 normally means that a stock portfolio has the same proportion of returns and risk as the S&P 500. The returns might be higher, but so too is the risk. The returns might be lower, but so too is the risk. The proportion is the same.
Hopefully, your portfolio’s Sharpe Ratio is 1+. Above 1 indicates that your portfolio is seeing better risk-adjusted returns than the S&P 500. Below 1 indicates that your portfolio isn’t getting the same returns for the same risk, as the S&P is.
Sortino Ratio
The Sortino ratio is fairly like the Sharpe ratio, but it focuses specifically on downside risk. It measures a stock’s return compared to a safe investment, but instead of dividing by the stock’s total volatility, it only considers the volatility from negative returns (when the stock’s price goes down).
A Sortino Ratio of 1+ indicates that your portfolio is seeing superior risk-adjusted returns. A Sortino Ratio below 1 indicates suboptimal performance.
Performance Over Time
Whatever benchmark, index or ratio you use to evaluate a financial advisor’s performance, be sure to take a long-term approach. Anyone can have a good or bad year. You’re investing for decades — track how your advisor’s performance has been over at least the past few years.
(If you’re not familiar with these benchmarks, your advisor should take the time to explain and review them with you.)
Client Service and Communication
Communication is fundamental to a successful client-financial advisor relationship. What a financial advisor provides is information and guidance, and they need to share that in a way which works for you.
Consider whether you’re happy with the frequency and quality of your advisor’s communications:
- Regular Updates: Does your advisor provide regular updates on your investments, and on changes in market conditions?
- Responsiveness: Do you receive a prompt answer to any questions you ask, whether about your account or potential investments?
- Clearness: Does your advisor explain concepts in a way that’s easy to understand, and are they willing to take time if you’re unclear on something?
You should also consider the fees that your advisor charges. Are they transparent about the fees that are charged, and about any other potential income they receive (e.g. commissions)?
If you’re unclear about your current advisor’s fees, you might want to change advisors. We can help you find a financial advisor who’s transparent and fair in what they charge.
Strategic Planning and Advice
An excellent financial advisor takes a holistic approach to your financial health. They should offer comprehensive services that meet all of your financial needs.
For example, you may need a financial advisor who assists with retirement planning, college savings, estate planning, insurance, and more. Exactly what services you need depends on your life stage and situation, and your needs will likely change at times. Whatever financial guidance you currently need, though, your advisor should be able to provide it.
Part of providing comprehensive services includes monitoring your accounts and investments. Your advisor should make portfolio adjustments when they’re needed, and keep you informed both of returns and potential new opportunities. You’re hiring them partly so you don’t have to check an investment account every day.
Ethical Standards and Fiduciary Duty
Of course, your financial advisor should act ethically. All professionals should — but it’s not a bad idea to double-check when they’re managing your sizeable savings. There are two details you can check:
- Fiduciary: Your financial advisor should have a fiduciary duty, which means they’re legally obligated to act in your best interests when working for you. This is a legal requirement, and can bring legal consequences if they violate it.
- Conflict of Interest: It’s not too uncommon for financial advisors to have potential conflicts of interest. This doesn’t mean they’re unable to advise you well, but you should be aware of any potential conflicts they might have. Your advisor should disclose any potential conflicts of interest that could influence their recommendations, and they ought to do so in a clear, open and transparent way.
Professional Development and Expertise
The financial sector regularly has new innovations, and it’s important for financial advisors to remain current on changes that could impact their clients.
For example, a new retirement account became available just in 2023. The Roth 401(k) isn’t widely available yet, but could be a great option once more employers begin offering it. A financial planner who offers retirement planning services should be familiar with the details of this account.
Your advisor should at least be completing continuing education of some sort, whether it’s a course, self-study units, or a certificate program. It’s a less common question, but feel free to ask what continuing education they work on.
If you have particular needs, you might want to look for an advisor who has relevant certifications. Someone who’s completed a continuing education certificate in small business valuation, for example, would be well-qualified to assist with the sale of a business.
For help finding a specialized financial advisor, use our match tool to find someone who’s a good match for you.
Regularly Reviewing Your Advisor’s Performance Can Help You Stay on Track
Your financial advisor should be regularly reviewing your investments to make sure they’re on track. Similarly, you can regularly review your advisor’s performance, to make sure your retirement savings and other financial goals are staying on track. Being proactive keeps you in control of your finances.
You don’t need to review your advisor’s performance every month or even quarter. At least once a year, however, look at their performance, areas of expertise, and your needs. This is assuming you’ve already vetted their communication, services, and ethical standards.
So long as your advisor’s performance, their knowledge, and your needs align, you should be in good hands when it comes to financial guidance. If there’s ever a disconnect between these three, however, don’t be afraid to consult other financial advisors. It might be time for a change.
What to do if You Aren’t Happy with Your Financial Advisor
If your financial advisor isn’t a good fit for you, it’s easy to find a new well-qualified financial advisor. You might seek out a new one because yours is underperforming, because you’re unhappy with another aspect of their service, or simply because you’ve outgrown what services they offer. Occasionally, clients need to move on simply because their needs have changed.
Whatever the reason, there’s nothing wrong with searching for a new financial advisor. It’s also quite easy to do.
We at Invested Better have a network of financial advisors who are well-qualified, and who work with a diverse array of clients. Simply use our match tool, which asks a few simple questions, and we’ll match you with a financial advisor who should be a good match for you.
The first step toward finding a new financial advisor takes just a couple of minutes (if that). The rewards could be years of better advice, and possibly of higher returns on your investments.
General Disclaimer: The information provided on this site is for informational purposes only and should not be construed as financial advice. Invested Better does not guarantee the accuracy or completeness of the information provided. Please consult with a licensed financial advisor before making any financial decisions.
Investment Risk Disclaimer: Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.
