The last three years have prompted most investors to rethink their strategy ... or maybe their broker's strategy. The question is, do you have the right person or company helping you make the most important decisions of your life—decisions about your money?
Here are five simple ways to determine whether you should look for a new broker:
Does he only call to sell you something? Many commission brokers will make money when you buy or sell a security, providing them an incentive to encourage trading. That leads to an industry no-no called "churning." Not all brokers churn their clients' accounts, but it does happen. The best way to determine if this is an issue is to consider the reason your broker calls you. Does he usually call to review your account or to sell you something?
A fee-based advisor may offer a better alternative because these advisors are required to review your accounts with you at least once per year. This adviser is considered a fiduciary who must act in your best interest, and his or her paycheck goes up (or down) along with your portfolio. If you make more money, so does he or she, and vice versa.
Has your portfolio remained the same for years? There is a time to buy, a time to sell, and a time hold. The market over the last three years has contained all three. But many brokers have sat on their hands. Having a plan to be more conservative near the top of the market or more aggressive near the bottom may sound like market timing, but it's not. It's about having an investment management plan. Ask your broker what he plans to do if the market suddenly crashes, or if it begins to significantly increase. He should have an answer readily available.
[See 4 Ways Your Financial Advisor Should Help You.]
Is he only using index funds? While index funds are very inexpensive, in the current market environment, they are not your best investment option.
The stock market is currently "range bound," meaning that it will experience volatility within a certain range, up and down, over the next few years (similar to the 1970s). While indexing will not produce outsized returns, the right active manager will take advantage of that volatility and actually make your account grow.
Is your account diversified? Diversification can be misleading. True diversification has less to do with having various investments and more to do with having investments that act differently in your portfolio. We are talking about correlation—having investments that do not all move in the same direction at the same time.
Similar to the colors of a rainbow, a proper diversification would mean a rainbow with all colors being different and distinct. If all the colors were, for example, different shades of red, this would not be a rainbow. We want all of our portfolio investments to look, act, and feel different. Every time you add an investment with a different correlation, we reduce portfolio risk.
Are all of your investments proprietary? A proprietary transaction involves purchasing an investment from the company's own list or inventory. Often, your broker is paid more to sell from that list.
Very few investment companies have high quality investments for each and every asset class. Some may have a great large-cap growth fund, while others may have a better international value fund. With the advent of the brokerage account many years ago, having a portfolio comprised of securities from many companies is common place and can provide a much higher quality plan. Instead of looking to the company's inventory, your broker should look for the best investment available on the market ... period.
Having a high quality portfolio that is actively monitored and traded when needed is extremely important. In today's market, it can mean the difference between making money or losing it.
Kelly Campbell, Certified Financial Planner and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Fairfax, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.
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