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Breakups are always hard.
Relationships with financial advisors are no exception. But experts say there are some telltale signs that it’s probably time to stop doing it.
“At the end of the day, it’s a business relationship,” said Maika Hauptmann, director of investor protection at the advocacy group Consumers Federation of America.
“If the advisor is not serving the client in the way that the client expects or expects, it is perfectly appropriate to end the relationship,” he said.
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Statistics vary depending on how many people use financial advisors.
According to a 2019 CNBC survey, about 17% rely on advisors to manage their money. A poll conducted last year by Northwestern Mutual found that share jumped to 35% during the Covid pandemic.
But according to a new study from Morningstar, only 6% of clients will ever fire an advisor.
Here are three situations in which it makes sense to break up.
1. Advisors don’t care about your goals
According to Morningstar, most investors who have fired advisers cite poor financial advice or service, or poor relationships, as the main factor in their breakup.
In fact, 53% of individuals said these reasons were the reason for their decision.
In other words, it’s not sluggish financial returns that people care about, said Morningstar behavioral scientist and report co-author Daniel Labodka.
Instead, problems can arise when advisors do not devote enough time to understanding who their clients are or their personal financial needs and goals.
Ultimately, the client’s money, whether retirement savings or not, is allocated to help the investor live the best life possible.
“We want to dig into these goals and work with our advisors,” said Rabotka. “You may not have thought that far as an investor. What is my deepest goal here?”
2. Advisors charge a lot for their work
Of course, some investors may not expect (or desire) that level of service.
For example, you may be looking for the maximum return on your investment without much consideration of extensive financial planning that considers cash flow, taxes, real estate, long-term planning, and more.
However, regardless of the services involved, it is important to consider costs.
According to Morningstar research, cost is the third-leading motivator for dismissing advisors, and it is behind poor advice and poor relationships.
“If they’re charging 1% [a year] All they do is portfolio management, which should raise red flags,” Hauptman said.
Advisory fees are often (but not always) expressed as an annual percentage of a client’s assets. For example, his 1% fee of $100,000 equals $1,000 per year.
Here’s where things get a little tricky. Fees are subjective.
The 1% annual fee for investment management services is typically high, but you may find your advisor’s efforts worth it. The same logic applies to various advice services.
“Look at the cost and quality the way I like to put it together,” Hauptmann said.
Clients should calculate the annual fee in dollars (not as a percentage) and determine if it is worth it. Alternatively, you can ask your advisor for a dollar fee. If you hesitate to answer, it’s a red flag, he says, Hauptman.
3. Advisors are bad at communicating
Let’s face reality. Finance can be confusing. Part of an advisor’s job is to briefly explain concepts and strategies to clients, according to Labotka.
“If everyone knew everything, we wouldn’t need financial advisors,” she said.
“Make sure you have someone to have that kind of conversation with—they will take the time to explain the changes they want to make to you. [financial] That’s why it’s a plan and an important source of value,” added Rabotka.
Poor communication can also undermine a client’s trust in an advisor, Hauptman said.
Do they communicate when they say they will? Haven’t they been in touch for a long time? Do they do what they promise or do what you want and expect? Are they recommending something you don’t understand or can’t explain in simple terms? Hauptmann asked.