The complex and messy realities of financial advice

It's a bad idea to buy a stock without looking at its quarterly earnings statement or annual report, but many customers fail to do their due diligence when signing up with financial advisors or brokers, opting for little more than gut instinct or a recommendation from a friend.

That was how Steve Singer, an attorney and father of two from New Jersey, found his advisor. He says that while his current broker doesn't typically manage portfolios under US$1 million, she made an exception for him: "She was handling my mother's cousin's portfolio, then my mother's, and at my mother's request is now handling mine."

But such an approach can yield mixed results. A new study by J.D. Power & Associates showed that while overall customer satisfaction with brokers is slowly increasing to pre-2008 levels, customers still aren't crazy about their brokers' fees, performance, and service.

When bad brokers and advisors happen to good people
When Maggie Welch's broker told her to sell some of her stock holdings, she assumed he knew best. Yet he's sold off several well-performing stocks, causing her to miss out on huge gains, while holding on to underperforming ones. He's even bought the wrong stock with a similar name to the one Welch had requested. "It is very difficult for me to get him to listen to me," she says, "and I'm very frustrated."

Welch echoes a more pressing fear many customers have. "Things have gotten so bad that I've tried to take a more active role in my financial planning, but I only know enough to be a potential hazard to my financial well-being." She'd like to find another financial advisor, but is finding it difficult. "No one can recommend an advisor and tax expert who will accept my paltry US$197,000 portfolio."

Debbie Klug was working with an advisor with whom she felt comfortable. "The first advisor asked tons and tons of questions, sent us — must've been eight or nine pages worth of questions and paperwork, wanted to know our goals, near and far-term expenses, that sort of thing. He asked the right questions."

But when her advisor moved to another firm, her portfolio was too small to take with him. Klug followed his recommendation to go to another advisor, but her experience was totally different. "This guy's strategy was 'invest it all.' He had us sell all the bonds that I had as my safe money and didn't advise us that we'd get hit like a ton of bricks at the end of the year by taxes."

Because she didn't feel as though she was making any more money with him than with she would managing it on her own, she opened a Vanguard account, where she says she feels very comfortable. "If you're not comfortable with somebody, don't go there. You're going to second-guess everything they do because you don't trust them."

Advising done right
Before you think all financial professionals are unhelpful, several customers shared stories of exceptional, long-term relationships with their financial advisors, spanning decades, states, and generations.

When Nan Langen Steketee married her husband Scott, she also married into his extended family's relationship with their financial advisor, who had worked first with his parents a generation before. The couple, who live in Philadelphia, continue to work with the Toledo, Ohio-based advisor, who also manages accounts for Scott's three siblings, the couple's grown children, and Nan's sister. The extended family is scattered along the East Coast from Boston to Atlanta, but Nan says all work well with the Toledo-based advisor on a variety of issues.

"She has advised us on loaning money to our children, helped us with risk decisions, and invested with social and environmental criteria in mind," which Steketee says is a key criterion for her and her husband. "She has made wise decisions, although she didn't prevent the 2008 market collapse!"

Don Canale had been less than inspired by his previous broker, a college friend of an employee, when he switched to a new broker. "There's a day-and-night difference between the level of service," Canale says. "From what I know of friends of mine who have had similar experiences, I got to be a big fan of this guy because he does a little bit more than everybody else."

That little bit more included changing firms when Canale mentioned he thought the fees were a little high. His broker agreed and during their next quarterly meeting, he had switched to another firm with lower customer fees.

That high level of service has also been backed by some notable returns; during the 2008 crash, Canale recalls receiving a call. "He said, 'Well, buddy, we're up for the year.' I said, 'How much are we up?' and he said, '1%.'"

"It's not a big gain," Canale says, "but 1% is still better than a 30% loss."

Stuck in the middle with you
Most broker/customer relationships fall somewhere between those extremes. Dan Abbas, an investor from Webster, N.Y., is working with a broker who meets his basic needs — with a little encouragement. "I am quite confident that he is doing a good job of keeping abreast of changes that might affect our finances, that he thinks a lot about alternatives, and is conscientious about doing what he feels is best for his clients. He is not always as attentive to details as I'd like, but when I point out something that does not make sense to me, he either explains it or corrects it.

"He is the first advisor I've worked with whom I feel really understands finances better than I do. He is not as sharp with the mathematical details as our previous advisor, but I keep him on track there as I am quite comfortable with the math."

Singer, whose recommendation came from his family, says that while he's relatively confident in his broker's recommendations, he's not necessarily loyal to her. "If she left tomorrow, I'm not certain I would follow her. I like her as a person, but I don't know that I would go through the rigmarole of her new brokerage." Singer says instead, he would most likely look for a recommendation of another broker within the same firm.

Advice from brokers
It would be easy to blame advisors or brokers alone for lacklustre service, poor returns, or not meeting customer expectations. But, advisors see their customer relationships as a two-way street.

"Some clients will put you to the test," says Frank Masselli, president of the Masselli Group and an industry speaker and trainer. "They'll come in and say, 'What do you have? What should I do?' The best advisor will say, 'I don't know yet. I don't know you well enough yet. I want to take the time to get to know you.' It can be painful for the advisor and for the client."

Carl Richards, a financial advisor, New York Times columnist, and author of The Behavior Gap, encourages investors and advisors alike to take in the bigger picture. "Nobody can make investment decisions in a vacuum; it all depends on the situation. … Good investment decisions can only be made in the perspective of something larger. An objective third party can help you determine your goals, make a plan, and at the end of that process make sure the investments you choose reflect what you said you wanted."

While it's up to the financial advisor to give the best advice to his or her customer based on their needs, it's ultimately up to the customer to determine what those needs are, and if a particular advisor is right for them. Research is critical, and to help with that research, we've prepared a checklist of questions to ask yourself and your broker before entering into any relationship — and for determining when it's time to leave.