Should I Stay with an Advisor who Can't Beat the S&P 500?
February 6, 2020
Estimated Reading Time: 4 minutes
Should I Stay with an Advisor Who Can't Beat the S&P 500?
One of the most common questions we hear asked is whether an investor should continue to work with an advisor who isn’t outperforming the market. Portfolio performance is a defining mark of a great advisor.
But is outperforming the market the best indicator for how well your advisor is doing?
This article offers three perspectives on how your advisor may be adding value beyond outperforming the market.
1. Your portfolio is not built to beat the S&P 500
As a review, the S&P 500 is a stock market index made up of the 500 largest U.S. companies. Their performance largely determines how the market is doing because if they are doing well, it is likely that the rest of the market is doing well.
A portfolio that can beat the S&P 500 is one that takes on risk. Because the S&P 500 is a 100%-equity index, you will need a 100% equity portfolio (and the risk volatility associated with it) to compete with it.
Usually, portfolios will be made up of both equity and fixed income exposure. Fixed income, by using bonds or preferred stocks, will be less volatile than equities. The lower volatility also comes with a lower expected return and a lower standard deviation, protecting your capital, but also limiting its exposure to high-return opportunities.
A portfolio like a 60/40 equity-to-fixed income one (which is considered a balanced portfolio) will be very unlikely to outperform the S&P 500 on a total return basis because of the allocation to fixed income.
2. Your advisor adds value outside the portfolio
While the capital in your portfolio is ultimately your most important asset, there are other ways your advisor could be adding value beyond your portfolio’s performance. Tax planning, financial planning, estate planning, and insurance planning are all areas in which your advisor is likely using his expertise to help expand your wealth.
An advisor familiar with tax planning can use in-portfolio methods like tax-loss harvesting and asset location to make sure your tax liability is as low as possible. Your advisor should already be focusing on the after-tax return as the most important number, so if you see your advisor using tax-inefficient investments or putting an income-producing investment in a taxable account, ask your advisor if he’s optimizing your portfolio for tax efficiency.
Financial planning can be an activity completely separate from the portfolio that can add value. At a 30,000-foot level, having a financial plan for the next three, five, or ten years put together by a financial advisor can help you feel more secure in your finances with the peace of mind that comes with knowing you are on-track as you head towards retirement.
At Chicago Partners, we use eMoney’s Wealth Management System (WMS) to help clients visualize their investment accounts, checking and savings accounts, and financial obligations to give them a global overview of how their wealth is doing. Many financial advisors use some type of software to help model financial plans - you should have access to this type of planning.
Your legal documents relating to your estate and your insurance policies also play an important part in a well-balanced wealth management plan. Having your financial advisor review your current documents to make sure they align with your financial and retirement plans creates a fully coordinated wealth management plan to accomplish your financial goals.
3. You have a great relationship with your advisor
The most important aspect of your financial advisor is your relationship with them. This is a soft and wiggly aspect of finances that can’t easily be quantified - you know it if you have it.
Your financial advisor is privy to some of the most sensitive information in your life. You should be able to have difficult or uncomfortable conversations with them without it feeling difficult or uncomfortable. Their job, as a financial advisor, is to help you sustain the life you want.
Your portfolio, financial plan, and taxes are only vehicles to help you get to where you want to be - living your ideal life, in whatever form that takes for you. Your financial advisor’s only (and ultimate) job is to help you get there. If you’re unhappy with how your advisor handles your requests, how responsive they are, or how they execute your requests, you should begin to talk with other financial advisors (as well as have a conversation about their service to you).
Ultimately, beating the S&P 500 is not the bottom line for a financial advisor’s performance. There are other ways your financial advisor adds value beyond your portfolio. But, most importantly, if you are unhappy with your financial advisor’s overall handling of your finances, it could be time to look for alternatives.
At Chicago Partners, our chief aim is to help you optimize your wealth. If you are not sure your wealth is being optimized by your current financial advisor, or you want to learn more about how you could be further optimizing your wealth, please reach out to us - we are always happy to help.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.
February 6, 2020
Estimated Reading Time: 4 minutes
Should I Stay with an Advisor Who Can't Beat the S&P 500?
One of the most common questions we hear asked is whether an investor should continue to work with an advisor who isn’t outperforming the market. Portfolio performance is a defining mark of a great advisor.
But is outperforming the market the best indicator for how well your advisor is doing?
This article offers three perspectives on how your advisor may be adding value beyond outperforming the market.
1. Your portfolio is not built to beat the S&P 500
As a review, the S&P 500 is a stock market index made up of the 500 largest U.S. companies. Their performance largely determines how the market is doing because if they are doing well, it is likely that the rest of the market is doing well.
A portfolio that can beat the S&P 500 is one that takes on risk. Because the S&P 500 is a 100%-equity index, you will need a 100% equity portfolio (and the risk volatility associated with it) to compete with it.
Usually, portfolios will be made up of both equity and fixed income exposure. Fixed income, by using bonds or preferred stocks, will be less volatile than equities. The lower volatility also comes with a lower expected return and a lower standard deviation, protecting your capital, but also limiting its exposure to high-return opportunities.
A portfolio like a 60/40 equity-to-fixed income one (which is considered a balanced portfolio) will be very unlikely to outperform the S&P 500 on a total return basis because of the allocation to fixed income.
2. Your advisor adds value outside the portfolio
While the capital in your portfolio is ultimately your most important asset, there are other ways your advisor could be adding value beyond your portfolio’s performance. Tax planning, financial planning, estate planning, and insurance planning are all areas in which your advisor is likely using his expertise to help expand your wealth.
An advisor familiar with tax planning can use in-portfolio methods like tax-loss harvesting and asset location to make sure your tax liability is as low as possible. Your advisor should already be focusing on the after-tax return as the most important number, so if you see your advisor using tax-inefficient investments or putting an income-producing investment in a taxable account, ask your advisor if he’s optimizing your portfolio for tax efficiency.
Financial planning can be an activity completely separate from the portfolio that can add value. At a 30,000-foot level, having a financial plan for the next three, five, or ten years put together by a financial advisor can help you feel more secure in your finances with the peace of mind that comes with knowing you are on-track as you head towards retirement.
At Chicago Partners, we use eMoney’s Wealth Management System (WMS) to help clients visualize their investment accounts, checking and savings accounts, and financial obligations to give them a global overview of how their wealth is doing. Many financial advisors use some type of software to help model financial plans - you should have access to this type of planning.
Your legal documents relating to your estate and your insurance policies also play an important part in a well-balanced wealth management plan. Having your financial advisor review your current documents to make sure they align with your financial and retirement plans creates a fully coordinated wealth management plan to accomplish your financial goals.
3. You have a great relationship with your advisor
The most important aspect of your financial advisor is your relationship with them. This is a soft and wiggly aspect of finances that can’t easily be quantified - you know it if you have it.
Your financial advisor is privy to some of the most sensitive information in your life. You should be able to have difficult or uncomfortable conversations with them without it feeling difficult or uncomfortable. Their job, as a financial advisor, is to help you sustain the life you want.
Your portfolio, financial plan, and taxes are only vehicles to help you get to where you want to be - living your ideal life, in whatever form that takes for you. Your financial advisor’s only (and ultimate) job is to help you get there. If you’re unhappy with how your advisor handles your requests, how responsive they are, or how they execute your requests, you should begin to talk with other financial advisors (as well as have a conversation about their service to you).
Ultimately, beating the S&P 500 is not the bottom line for a financial advisor’s performance. There are other ways your financial advisor adds value beyond your portfolio. But, most importantly, if you are unhappy with your financial advisor’s overall handling of your finances, it could be time to look for alternatives.
At Chicago Partners, our chief aim is to help you optimize your wealth. If you are not sure your wealth is being optimized by your current financial advisor, or you want to learn more about how you could be further optimizing your wealth, please reach out to us - we are always happy to help.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.