How to Evaluate the performance of your financial advisor

So, you just got off a call with your financial advisor or advisory firm and you feel confused, even frustrated. You’re told that you should be really happy with your advisor – that your returns are great, your allocation looks healthy and your financial plan is on track. Nothing to do, just keep going about your business because your financial future looks bright. But is it? And what about fees? That didn’t come up in our call. How much am I actually paying for financial advice? Is that a good deal? And the market – it’s a little skittish right now – how much could I lose if there is a crash? Bottom line is, you’re not alone. It’s really hard to figure out financial advisor performance. In this session, we’re going to help you understand how to evaluate the advice you are paying for so you can focus on achieving your financial goals, not padding your advisor’s bank account.

How Advisors measure “Advisor Performance” 

Advisors will tell you that their clients have great performance. Hmm… well all advisors can’t be great and each advisor can’t be great all the time. Be careful here. Advisors tend to define performance in the way that makes them look like your financial hero. When an advisor’s returns are high, they measure performance as absolute return. This is the combination of the income received from your investments plus the increase in the value of those same investments. But absolute return ignores the risk your advisor is taking with your money to achieve that high return. When your advisor’s returns do not meet your expectations, they will switch to defining performance as risk adjusted returns. This is typically measured by the Sharpe Ratio which is your absolute return less the risk free rate, divided by the standard deviation of your investment returns. Did your advisor tell you the Sharpe Ratio of your portfolio, but did not give you the Sharpe Ratio of your benchmark for the same time period? Start asking questions. Sharpe Ratios need to be compared to a benchmark, one number alone does not tell you anything.

How you should measure “Advisor Performance”

Financial advisor performance reporting needs to include more than just your absolute or risk-adjusted investment returns. You’ve probably heard your advisor talk about your risk tolerance quite a lot. As a wealth manager, your financial advisor or robo-advisor performs a critical function – assessing your willingness and ability to take on investment risk. It’s their job to invest your money according to your risk tolerance. Pretty basic, right? Advisors achieve this by investing in multiple asset classes including stocks, bonds, cash, and alternatives. So really, your advisor’s performance is uncovered by evaluating the securities that make up each asset class as well as the change in the value of those securities over time. To evaluate your advisor’s recommended investments, we turn to risk, allocation, fees, and yes, returns.


It’s hard not to focus on your advisor’s returns so what better place to start. After all, you’re probably happiest when your advisor makes you piles of money year after year. So, what should you watch out for? Advisors typically show performance “gross of fees” which means the performance presented does not include their fee. And remember, you still have to pay them that fee…Your advisor might have chosen to show you gross of fees returns to have a 1-1 comparison with an index or benchmark which does not include fees even though it does not reflect your bottom line. If your advisor ever shows you gross of fees returns, ask them for net of fees returns right away. As for which benchmark to choose, you really ought to measure your advisor’s returns vs a benchmark that reflects you as an investor after all fees.


We all know that markets don’t always go up and neither does your advisor’s portfolio. Investing is inherently risky so it’s critical to consider the amount of money your advisor is risking to get you that high return. Advisors typically measure risk as the standard deviation of the portfolio’s historical returns. Historical hmm…  The securities you own in your portfolio change over time though. And you recall your advisor telling you that “past performance is not indicative of future returns”. A more current/relevant/intuitive measure of risk is understanding how your current portfolio performs during historical market crashes. This gives you an idea of how much risk you are taking today. This amount should not be more than you are comfortable losing if a market crash repeats.


But returns and risk are just a piece of the pie. The advisor should also recommend a portfolio that fits with your risk tolerance which is the amount of investment risk you are willing and able to take. The leaders in asset allocation research found in “The Equal Importance of Asset Allocation and Active Management” (2010; Xiong, Ibbotson, Idzorek, Chen) that 75% of the variation in your overall return relates to being invested in the market. Of the remaining 25% of investment return variation that your advisor can control, 50% is attributed to the mix of asset classes that your advisor invests you in. If that mix of asset classes are inappropriate given your risk tolerance, you can have a terrible investment experience whether the market goes up or down Your advisor should provide an asset allocation that fits with your risk tolerance.

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Find the fees! Investors should measure their advisor’s performance when it comes to fees as well. Many advisors charge an investment management fee. It is possible for advisors to charge you the wrong monthly or quarterly fee, so it is important to keep track of these. Advisors can also churn your accounts or invest you in portfolios that trade often and all those trades cost money. Don’t lose sight of this and set clear expectations with your advisor about what you are willing to pay over time. But that’s not all of the fees you could be charged. You should be aware of the fees that you are hit by in ETFs, Mutual Funds, and other commingled vehicles or complex financial securities. Don’t be blindsided and make sure you have the full picture. The higher your fees the lower your performance – the higher your advisor’s paycheck or the custodian’s earnings, or the investment vehicle’s earnings – at your expense.

Final Words

Assessing your financial advisor or robo-advisors is absolutely critical to your financial future. Looking at your managed accounts and understanding the health of your returns, allocation, risk and fees can have a huge impact on your financial future. It’s important to understand them now and to continuously monitor them. Since client portals aren’t always the most user friendly, account aggregation tools can help with performance reporting. Thanks to compounding interest, time is critical. These are things you need to understand and bring up with your financial advisor. If you feel in the dark and don’t have the confidence to discuss these issues with your advisor, something is wrong. You pay for financial advice and you need to be sure you are paying for good advice from someone who has your best interest at heart. If you don’t, it may be time to reevaluate and look for the right financial advisor.

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