So, You Broke Up With Your Advisor? Ask These 3 Questions When Interviewing Your Next One.

If you've broken up with your financial advisor recently, you're not alone. According to McKinsey, clients tend to fire their advisors at a much higher rate in bad markets than in good ones. At the depths of the Great Financial Crisis, for example, client attrition spiked to 10% — that's more than double the defection rate seen in the middle of a bull market. If that trend holds, we are about to witness a surge of clients deciding to "never, ever, ever get back together" with their advisors.

For those that haven't been following along, the stock market lost over 20% of its value in the first half of the year. And that's just the broad market. Through June 30th, growth stocks like Netflix (NFLX) and Facebook parent Meta (META) were down 70% and 52%, respectively. Bitcoin got in on the action too, losing 60% of its value. Interestingly, performance was not uniformly horrible across all sectors; it really mattered where you were invested. Energy, for example, was up 29%. Value stocks were only down 11%, while growth stocks were down a much worse 25%. Cue the awkward conversations happening between clients and advisors, especially those with heavy growth and crypto exposure.

It is important to point out that what we're seeing now is very different from the market that we experienced from 2010-2021. During that time, the S&P 500 index was up about 450%. So, if you found yourself feeling a little smug about your portfolio heading into this year, be careful not to confuse good timing with good investment decisions. Anybody can do well in an up market.

But what about a down market? What should your advisor be doing for you then? Here are a few questions to consider that are especially relevant in today's bear market (my other favorites are listed here).

1. What's your track record? What has performance been like over a full market cycle (not just the good years)? Is the same team in place? Is the performance repeatable? Does a third party audit your returns? I'm astonished at how many advisors don't have a simple proof statement to show their clients.
2. What are you doing to make the best of a bad situation? Has the advisor been sitting on their hands, or playing offense with tactics like tax loss harvesting to reduce taxes? Are they exploring ROTH Conversions for pre-tax IRAs and old 401(k)s, or establishing 529 accounts with excess cash while the market is down? For charitably inclined individuals, does it make sense to gift temporarily depressed stock to a charitable lead trust while it is "cheaper" to do so?
3. Who's driving the car? This one is important, so let me give a little background. Many investors don't realize that decisions made at the individual stock and bond level aren't nearly as important as where their money is invested more broadly. To put this into perspective, let's say you are an investor in a hypothetical Russian stock mutual fund. The manager of this hypothetical fund employs the best team of analysts, and they consistently pick the top performing Russian stocks, and the fund ranks in the top quartile of Russian stock mutual funds each year. All that is great. But the problem is that Russian stocks, as a group, have lost 45% of their value in dollar terms, annualized, for the last ten years. Translation: You're buying the best house in a terrible, horrible, no good, very bad neighborhood. Wouldn't it be better to avoid Russian stocks altogether? And if the answer to that question is not a resounding 'yes,' check out this 1991 article published in the Financial Analysts Journal for more data to support this notion.

The problem is that these decisions are often made by an individual who lacks the necessary qualifications to put a portfolio together. Education such as advanced degrees in finance, industry certifications, and experience are some of the considerations you need to make when interviewing.

In any case, the market will rebound. And so will you.

Ooh-ooh-ooh-ooh-ooh

This time, I'm telling you, I'm telling you...