Brace Yourself for 2015
If you’re like most people with substantial assets, you have a financial advisor whom you pay to influence or control the investment of your assets. It is your advisor’s responsibility to recommend changes that will help you achieve your financial goals in 2015. Even though you have delegated this role to your advisor, you need to establish mutually acceptable expectations. With looming questions about Fed policies, slowing global growth and stock market values, the year ahead may be volatile. You and your advisor need to be on the same page. Here’s how to make that happen.
Bull Market Genius
Let’s face it: Your advisor has had an easy job for the past five years. The S&P 500 has averaged a 15 percent annual return and the general bond market about 4 percent. Should your advisor get credit for returns produced by the securities markets? On the one hand, he or she probably recommended the asset allocation and helped you select the money managers, and his advice may have kept you fully invested. On the other hand, you could have produced the same returns—for substantially lower costs—with exchange traded funds or index funds.
Measuring Your Results
Your advisor should provide performance reports that display your results before and after all expenses are deducted. Then you can compare your advisor’s results to applicable benchmarks, like market rates of return, to determine your relative performance. If you paid higher fees to beat the market, did you actually beat the market?
No one expects 2015 to be a repeat of the disastrous 2008, but the new year could produce returns in the single digits, positive or negative. When the DJIA is over 16,000, it doesn’t take a lot of uncertainty to make a jittery market slow to a crawl—or swoon.
So one major topic of discussion for you and your advisor should be his strategy for minimizing your risk of significant losses in 2015. The focus of the discussion should be your tolerance for risk and your time horizon before you need your assets. Be realistic: Your advisor may not be able to produce positive returns in a down market. But he should be able to minimize your losses.
Now is a good time to start looking at the fees, commissions and transaction charges you are paying service providers: planners, advisors, money managers, custodians and broker/dealers. Pay particular attention to the expenses of under-performing managers of mutual funds and hedge funds.
Investors don’t typically worry about expenses much when the market is booming. But if 2015 returns are substantially lower than those of the past five years, expenses will loom larger. You can’t control returns, but you can control fees and expenses.
Create an Investment Policy Statement
When all your communications with your advisor are verbal, you introduce the risk of misunderstandings and you reduce your advisor’s accountability for performance, risk management and expense controls. If you don’t already have one, now would be a good time to work with your advisor to create what’s known as an investment policy statement. The IPS documents your expectations for your advisor and your requirements when your assets are invested in the securities markets. It’s a standard request from investors who understand the importance of documented communications, and all higher-quality advisors have the ability to produce a custom IPS for their clients. Like all the steps discussed above, the IPS will help prepare you for an unpredictable year.