Do you read your brokerage statements?
Drew Horter, Chief Information Officer of Horter Investment Management, wouldn’t be surprised if you didn’t. “We find most people read the first two pages to see if it’s up or down, and then close the statement,” he says. “It’s crucially important that you not only read it, but that you’re able to understand what’s in it.”
Your brokerage statement, which might arrive via email or snail mail at least once a quarter, reflects the activity in your investment portfolio. And if you read all the way through it, Horter says, you might see some of these red flags that indicate your advisor isn’t making the best decisions:
1. Asset allocation that doesn’t align with your risk tolerance
One of the first, key steps a financial advisor takes is to run a risk tolerance test to assess a client’s risk parameters — how much money they can afford or are willing to lose, explains Horter. “Understanding how much risk a client wants to take will define the allocation,” he says. A riskier portfolio, for instance, might hold a larger percentage of stocks, while a more conservative portfolio might tend toward more bonds. If the mix of securities in the portfolio (otherwise known as “asset allocation”) doesn’t appropriately reflect the risk you want to take, it’s a red flag.
2. Asset allocation that hasn’t changed in the last year
As certain investments outperform others and earn disproportionately more money, your portfolio may become unbalanced and no longer reflect its original allocation. That means it should be “rebalanced” to get the allocation back in line. “If one part of the portfolio is outperforming the others, you need to rebalance,” explains Horter. “It should be at least semiannual.”
3. Insufficient bond allocation
If the bonds your portfolio holds are only municipal or treasury bonds, Horter explains, you should be wary. “While maturities are important, it is also necessary to take into account quality and performance within the bond’s portfolio,” he says. “Not all bonds are the same. Most people and advisors don’t understand the risks of individual municipal or treasury bonds.”
4. Excessive trading
Also known as “churn,” an excessive amount of trades — Horter says more than 20 or so a month — could indicate that the advisor is making trades to earn commission, instead of working for your portfolio’s best interest. “Generally, you look at the back of your statement and the last 10 pages or so will tell you all the different buys and sells,” he explains. “I would definitely want to receive the confirmations on each buy and sell, the commission, and whether it’s a principal trade or not — some brokerage firms hold stock in inventory and sell it to the client. I want to know: Is my advisor making money for the brokerage firm or for me?”
5. Unclear notification of fees
“All performance should be reported net of fees,” says Horter. If you aren’t sure how much you’re paying in fees, and for what, be sure to ask your advisor to clarify.
In a brokerage statement, brackets indicate losses. “What caused them? Why do I have them?” Horter recommends asking. “Most advisors don’t want to admit they have created losses, but if you know the S&P 500 has been going up and your portfolio is showing losses, that doesn’t add up.” The best thing you can do in the case of brackets, Horter advises, is be aware of market patterns. “An educated client is the best client — he can know if an advisor is being upfront.”
7. Mutual fund fees and history
Mutual funds in and of themselves aren’t red flags, but they can lend themselves to obfuscation. “If your advisor is buying mutual funds, how is he staying on top of the quality of the funds in the portfolio?” Horter asks. “It’s the fund manager that determines its performance — has he been there at least 10 years? If a manager left last year, that fund has no history.”
Plus, he says, you want to be wary of fees associated with mutual funds. On the statement, you’ll see the fund name and symbol. If an A or C appears after that, you’re paying additional fees, which may include loads (sales commissions) and 12B1 fees (for distribution costs like advertising). “If there’s no letter, there’s probably no load.”
If you see any of these red flags, Horter says, the first step is to ask your advisor about your concerns. If he or she can’t alleviate them, it may be time to start looking for someone else — preferably a fiduciary, who must act in your portfolio’s best interest. “This is your money,” he reminds us. “No one is going to look out for it like you are.”
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