My Financial Advisor Is Losing Money: What to Do
Concerned your financial advisor's investments are declining? Learn to assess performance and plan your financial strategy.
Seeing your investments decline can be an unsettling experience, particularly when you have entrusted your financial well-being to a professional financial advisor. Understanding the situation and how to approach it is an important step in navigating such times.
Understanding Investment Declines
Investment portfolios can experience declines for a variety of reasons, some of which are beyond the control of any financial advisor. Broader market forces frequently impact investment values. Economic cycles, geopolitical events, and industry-specific downturns can lead to market corrections or even bear markets, where asset values broadly decrease.
A portfolio’s decline can also stem from factors specific to its construction and management. An unsuitable asset allocation or investment choices that do not align with an investor’s stated risk tolerance can contribute to losses. For example, a portfolio heavily concentrated in a single stock or sector may experience higher volatility compared to a diversified one. The impact of fees can erode returns over time, making declines feel more significant.
Evaluating Your Financial Advisor’s Performance
Assessing your financial advisor’s performance objectively requires looking beyond just the immediate numbers. A valuable way to evaluate performance is by comparing your portfolio against relevant market benchmarks. Benchmarks are market indexes, such as the S&P 500 for large-capitalization U.S. stocks, or bond indices for fixed income investments, which serve as a standard for comparison. Comparing your portfolio’s returns to an appropriate benchmark helps determine if the decline is due to broader market movements or specific underperformance by the advisor.
It is also important to consider if the current portfolio strategy aligns with your financial goals, time horizon, and comfort level with risk. If your strategy is aggressive and the market is experiencing a downturn, some decline might be expected, but significant losses in a conservative portfolio could be a concern. Reviewing the advisor’s communication during market downturns is also relevant; transparent and proactive communication about the situation, fees, and performance is a positive sign.
Understanding whether your advisor operates under a fiduciary duty is also important. A fiduciary is legally obligated to act in your best financial interests, prioritizing your needs over their own potential for profit. This standard requires them to avoid conflicts of interest and seek the best available terms for you, unlike advisors who may only be held to a “suitability standard” which allows them to recommend products that are suitable but not necessarily the most advantageous for you. Fiduciary advisors typically earn fee-based compensation, rather than commissions, which helps minimize conflicts of interest.
Communicating with Your Advisor
Engaging in a productive conversation with your financial advisor about investment declines requires preparation. Before meeting, gather recent account statements, review your initial financial plan, and note any specific questions or concerns you have regarding your portfolio’s performance.
During your meeting, ask clear questions to gain a better understanding of the situation. Inquire about their current market outlook, how your portfolio strategy is positioned in light of current economic conditions, and what, if any, adjustments they are considering. You might also ask for a detailed explanation of all fees paid and how these fees impact your net returns. Listening critically to their explanations will help you assess their expertise and transparency.
It is also beneficial to discuss expectations for future communication and performance reviews. Establishing a clear understanding of how and when your advisor will provide updates, especially during volatile periods, helps manage your expectations.
Considering Your Next Steps
After assessing your portfolio’s performance and communicating with your financial advisor, several paths may be appropriate. If the losses are primarily market-driven, the strategy remains sound, and your advisor has communicated clearly and acted in your best interest, continuing the relationship may be suitable. Market downturns are a normal part of investing, and remaining invested can be beneficial over the long term.
In some cases, a minor adjustment to your investment strategy or risk profile might be necessary. This could involve rebalancing your portfolio to align with your comfort level or making slight modifications to asset allocation in collaboration with your current advisor.
For those who remain uncertain, seeking a second opinion from another qualified financial professional can provide an unbiased assessment of your current portfolio and advisor’s approach. This does not commit you to switching advisors but offers an additional perspective. If, after thorough evaluation and communication, you decide to seek a new advisor, prioritize those who operate under a fiduciary standard, have transparent fee structures, and demonstrate clear communication practices.