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How do I judge a Financial Advisor’s past performance?

Written by: Wealth Village Editorial Team

When it comes to finding a financial advisor one of the most important factors to consider when choosing an advisor is their past performance - which includes how well the financial advisors clients' portfolios have performed as well as how well the advisor has treated their past clients.   However, it can be difficult to know where to look and what to ask to gauge an advisor's track record. Here are a few things to keep in mind when evaluating a financial advisor's performance:

Ask about client performance:

A good financial advisor should be able to provide information about how their clients' assets have grown over time. You'll want to know if their clients' investments have performed well both in absolute terms and relative to the broader stock market.

  • Absolute returns refer to the actual rate of return on an investment. For example, if an advisor's client invested $100,000 and it grew to $120,000 over the course of a year, the absolute return would be 20%. Absolute returns are important to consider because they give you a sense of how much money the advisor's clients are actually making on their investments.
  • Relative returns refer to how an investment's performance compares to a benchmark index. A common benchmark index to use is the S&P 500, which is made up of the 500 largest publicly traded companies in the United States. For example, if an advisor's client earned a 15% return on their investment over the course of a year and the S&P 500 returned 10%, the relative return would be 5%.
  •  Be wary of advisors who can't or won't provide this information.

Check regulatory records:

  • It's also important to know if the advisor has had any complaints or disciplinary actions filed against them. The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) both have online databases where you can search for an advisor's regulatory history. This will let you know if they have ever been fined or suspended by these organizations.

Look into the advisor's licenses and certifications:

  • Advisors may have different licenses and certifications depending on the type of services they provide. Being a Registered Investment Advisor (RIA) is a good indication of an advisor's adherence to fiduciary standards, which require that they put their client's best interests above their own.

Ask for references:

  • Ask the advisor if you can talk to any of their current or past clients. It's important to get a sense of how they handle customer service and communication and get an idea of what the experience of working with the advisor is like.

Be wary of overly optimistic returns:

  • Be cautious of advisors who promise above-market returns, such as those that are not obtainable by average investors.

It's important to remember that finding a good financial advisor takes time and research. It's also worth asking yourself, do you feel comfortable with the advisor, the advisor’s style and approach? Understanding a financial advisor's qualifications, experience, and overall approach, as well as a review of their track record, can help you make an informed decision about who to trust with your financial future.

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