8 Red Flags That Come Up During Portfolio Reviews

Many clients multitask.  They invest with you.  They invest on their own.  They might have another advisor.  You encourage them to keep you supplied with enough information so you can look at the big picture during portfolio reviews.  Red flags might be difficult questions clients ask or mistakes they are making on their own.  You want to be prepared.

1, Why am I underperforming the market?  They see their favorite index is up 10% YTD.  They are not.  Clearly, you are doing a poor job.  Why am I not doing better?

Explanation:  It’s rare a client is invested 100% in equities.  That’s what the big three indexes measure.  Your client owns stock, bonds and cash equivalents.  They need to see a blended index for proper comparison.  You need to have that ready.

2. Why aren’t my mutual funds up as much as they should be?  Thanks to you, they own the right funds.  The mutual fund performance review sheets show a spectacular return over five years.  They owned it for the whole period.  What’s wrong?

Explanation:  Mutual funds distribute capital gains at the end of the year.  Some clients like these coming into the account because it’s like their fund awarded them a year end bonus.  These funds should be reinvested back into the fund, which can be done automatically.

3. Forgetting about withdrawals.  You client knows the market had a good year.  They are heavily invested in stocks.  Their account value has barely moved.  This can’t be!  What happened?

Explanation:  Clients often forget about money they have withdrawn from their account, especially if it’s as easy as using a checkbook.  When you review performance, it’s important to explain up front how much money was added and withdrawn over the period you are measuring.

4. This stock is down.  I’m losing money.  You recommended it years ago.  It’s done fine, but has it’s ups and towns.  Clients often measure losses vs. the “high water mark” or the highest the stock reached that year.

Explanation:  They need to look at the bigger picture.  How much was their initial investment and how much is it worth now?  How did it perform in difficult markets before?  You can’t predict the future, but they should measure from the price on the date of purchase, not the highest price it reached. 

5. Selling winners and holding losers.  When clients invest on their own, often in a self directed account elsewhere, they are quick to nail down profits and make excused why stocks losing value will bounce back.

Explanation:  Clients should let their winners run, protecting themselves to a degree with Stop and Limit orders.  If another stock is falling when everything else is rising, they should have a strategy to limit their losses.

6. Ignoring tax consequences.  Some clients love day trading.  They do this elsewhere, often in an online account where trades are “free”.  Perhaps they have another advisor who is an active trader.  They may not be aware short term gains have significant tax consequences at year end.

Explanation:  Someone needs to be “the adult” and keeping an eye on gains and losses.  As their advisor, you might do it for the assets held at your firm, but what about the other assets?  This could be a good argument for consolidating assets at your firm.

7. Not having a cash reserve.  Clients run into emergencies.  The unexpected tax bill is a good example.  They need to raise money.  We’ve all heard “This isn’t a good time to sell.”  The risk is the accounts held with you become the source of those funds.

Explanation:  Clients need money on the side, so investing can be considered long term.  Tuition bills should not be a reason to sell stocks.

8. Buying things they don’t understand.  Late night TV ad and infomercials can make a good case for investing in gold and other “alternative” investments.  They might hear about a great investment from a friend of a friend.  Clients can do as they please with their money.  It’s theirs.  We can’t stop them.

Explanation:  You would appreciate knowing about these opportunities before they send money.  They might have a small amount set aside for speculative investments.  Your concern is if they understand how the investment works, if it’s legitimate and the costs involved.  You might have an alternative that’s more mainstream.

Portfolio reviews are good because they are like report cards.  Advisors need to anticipate questions and try to help clients limit the damage they might inflict on themselves.

Related: Prospecting and The Joy of Persistence