Muldoon: Here's what you should demand from a financial advisor

Muldoon: Here's what you should demand from a financial advisor

July 3rd, 2016 by Andy Muldoon in Business Around the Region

Photo by Contributed Photo /Times Free Press.

I love it when someone asks an adviser, "So tell me, how have you done?" Typically, this question is asked to better understand an adviser's returns from a product or solution in comparison to the individual's desired returns. They ask this question based on either historical data or their own experiences, including their risk tolerances, investment objectives and even media exposure.

On the other hand, a required return is a return estimate resulting from an individualized and dynamic planning process. It takes into account each client's unique set of circumstances. There is not a composite or one-size-fits-all category. Importantly, a required return is typically inflation adjusted, since spending and savings patterns are always influenced by prices moving higher.

For example, a balanced portfolio of 60 percent stocks and 40 percent bonds over the past 50 years has had a nominal return of 9.51 percent. However the real, or inflation adjusted, return was only 5.10 percent.

I fully understand the line of questioning and generally lay the blame at the feet of my industry for frequently thumping our chests saying "Hey, look how good we are!" Luckily wealth management is changing, and the focus is more on planning and required returns — not product returns.

Nevertheless, this focus on desired returns vs required returns remains problematic. One expecting a desired return of 9 percent to 10 percent from the U.S stock over the next 10 years might prove to be too optimistic. Additionally, one expecting bonds to return 7.45 percent over the next 10 years (their return over the past 50 years) might have trouble assembling a diversified portfolio when the 10-year Treasury is only yielding 1.46 percent.

This is where coaching and planning comes in. Today's wealth management clients are requiring their advisors to deliver a more holistic wealth management approach as a service rather than a product sale with all the bells and whistles.

The good coaches tend to be the ones that introduce this approach during the very first meeting by explaining that this is the best way to achieve long term objectives. Under this scenario conversations change, focus changes and even the written material changes.

I am not suggesting that investment performance is not important. Rather, I prefer to talk in terms of achieving a client's required return than pure investment returns. Said another way, the majority of the conversation ought to be about what is going on in one's life that could impact their long term plan versus how a large cap growth manager beat their benchmark by 25 basis points.

So what are the types of things you should demand from today's advisors:

- Financial Plan. Even if you have multiple advisors, you need to have one plan in place and communicated to everyone.

- Investment Policy Statement. Defines your investment objective and risk tolerances, including the types of investments which can and cannot be used.

- Service Delivery Expectations. You should clearly understand how, when and by whom the advisor's service will be delivered, even on a daily basis.

- Thorough understanding of your tax situation. This would include both retirement and non-retirement assets. Some clients do not want to extend tax returns, so certain types of investments might be excluded.

- Depth of the Team. Understand who is there to assist you and your family if your advisor is unavailable or leaves the firm. What are the team's qualifications?

- Follow-up after every conversation and meeting. Demand a written follow-up to every meeting and conversation. This material is critical to mutual understanding, future meeting productivity and planning reviews.

- Family Governance and Educational Resources. Understand what family governance and educational resources are available.

So when someone asks me "how have I done" I just say really well and smile knowing our families are doing well!

Andy Muldoon is a senior vice president at The Trust Company in Chattanooga.

Getting Started/Comments Policy

Getting started

  1. 1. If you frequently comment on news websites then you may already have a Disqus account. If so, click the "Login" button at the top right of the comment widget and choose whether you'd rather log in with Facebook, Twitter, Google, or a Disqus account.
  2. 2. If you've forgotten your password, Disqus will email you a link that will allow you to create a new one. Easy!
  3. 3. If you're not a member yet, Disqus will go ahead and register you. It's seamless and takes about 10 seconds.
  4. 4. To register, either go through the login process or just click in the box that says "join the discussion," type your comment, and either choose a social media platform to log you in or create a Disqus account with your email address.
  5. 5. If you use Twitter, Facebook or Google to log in, you will need to stay logged into that platform in order to comment. If you create a Disqus account instead, you'll need to remember your Disqus password. Either way, you can change your display name if you'd rather not show off your real name.
  6. 6. Don't be a huge jerk or do anything illegal, and you'll be fine.

Chattanooga Times Free Press Comments Policy

The Chattanooga Times Free Press web sites include interactive areas in which users can express opinions and share ideas and information. We cannot and do not monitor all of the material submitted to the website. Additionally, we do not control, and are not responsible for, content submitted by users. By using the web sites, you may be exposed to content that you may find offensive, indecent, inaccurate, misleading, or otherwise objectionable. You agree that you must evaluate, and bear all risks associated with, the use of the Times Free Press web sites and any content on the Times Free Press web sites, including, but not limited to, whether you should rely on such content. Notwithstanding the foregoing, you acknowledge that we shall have the right (but not the obligation) to review any content that you have submitted to the Times Free Press, and to reject, delete, disable, or remove any content that we determine, in our sole discretion, (a) does not comply with the terms and conditions of this agreement; (b) might violate any law, infringe upon the rights of third parties, or subject us to liability for any reason; or (c) might adversely affect our public image, reputation or goodwill. Moreover, we reserve the right to reject, delete, disable, or remove any content at any time, for the reasons set forth above, for any other reason, or for no reason. If you believe that any content on any of the Times Free Press websites infringes upon any copyrights that you own, please contact us pursuant to the procedures outlined in the Digital Millennium Copyright Act (Title 17 U.S.C. § 512) at the following address:

Copyright Agent
The Chattanooga Times Free Press
400 East 11th Street
Chattanooga, TN 37403
Phone: 423-757-6315