It is not uncommon for folks to change their financial advisor from time to time. It might be because of dissatisfaction with the results delivered by that advisor or the advisor’s lack of attention to your interests and maybe even for that advisor’s lack of expertise in some aspects of financial planning. On the other hand, it might be because your advisor is retiring, is moving to another firm, or has left the business entirely.
When you come on board with a new advisor, you may well discover that the new advisor wishes to sell all or most of your existing investments so as to put you into a new mix of investments. It might be because that advisor’s firm avoids individual securities and prefers the diversification of ETFs or mutual funds. It might be because the advisor wants to lower the expenses of the current investment mix or simplify the holdings to make management easier. Other reasons might be an investment philosophy different from that of the former advisor, anticipated advantages of using proprietary funds, or even a new investment that the new advisor expects will do very well. Unfortunately, some advisors will recommend a change simply to put you into a more expensive investment that pays them or their firm better than your current holdings. You should be aware of exactly how different the recommendations are from what you presently hold and an explanation for the changes that is more than simply “because I say so”.
It is critical that a full and open discussion take place BEFORE you sign an investment advisory agreement with the new advisor. Very often, these agreements grant full discretion to the advisor to make any trades they want to make without first obtaining your understanding and approval. It is better for both you and your advisor to understand each other and be on common ground before the trading starts so that your relationship will not be damaged by unexpected and undesired changes in your portfolio. There should be a two-way discussion here and definitely no trades without prior notice and discussion, not to mention your approval.
Whatever the advisor advises, you should consider whether the described approach is necessary or appealing to you and determine whether the advisor has considered the potential impact on your tax situation as well as your personal preferences for investments. For example, you might be very attached to a few hundred shares of a company which you inherited from a family member and want to keep that in your portfolio. Or you might work for XYZ Corporation and own a considerable amount of that company’s stock subject to restrictions and limitations on sale. What you will want from your new advisor is that the advisor understands your specific goals and has an ability to accept and work with investments you would want to retain.
Another important consideration here is that a clear-cutting approach to your current account holdings can be very damaging from an income tax standpoint. Where there are significant long-term gains in holdings within taxable accounts, careful planning is necessary to ensure that you are not hit with a big tax bill. Harvesting losses can be a useful way to offset gains and might help. But where there are very substantial overall gains, a good advisor will understand the tax impact and work with you to minimize that issue. Perhaps gradual sales can help reduce tax liability and allow for a better diversified and balanced portfolio.
Bottom line, it is important to make sure your advisor understands that in most cases there is absolutely no reason to rush into sales just so the advisor can put his or her stamp on your portfolio. Change simply for the sake of change is not usually a good idea. It is much more helpful for an advisor to understand your overall financial situation and preferences before taking any significant action. Once the advisor has taken the time to look at what you have, why and what can be expected if there is a sale, then it is time for the advisor to show you how it is in your best interest to sell and exactly why and how you are going to benefit from the transaction. If an advisor won’t take the time to listen to you and explain what and why the advisor intends to recommend for your portfolio, you do not want to work with that advisor.
George Chamberlin & Mentor RIA Consulting © 2018