Say you have hired a financial advisor, and on the surface, everything may seem to be going fine. Your investments are growing, you meet with the advisor occasionally, and performance reports land in your inbox on the predetermined day. But how do you really know if your financial advisor is doing a good job?
Just as you are evaluated at work, your financial advisor should be evaluated as well. Regularly reviewing their performance helps you understand whether they are working in your best interest or if it is time to consider a change.
Evaluating your financial advisor ensures the advice you receive aligns with your goals. Doing this from time to time ensures you are on track. And if something feels off, you can explore other options. Let’s take a look at how to evaluate financial advisor performance.
How to evaluate a financial advisor's performance?
1. Take a look at your portfolio – Before and after
One of the simplest ways to evaluate your financial advisor’s performance is to look at your investment portfolio itself. Start by comparing where you were before you hired the financial advisor and where you are now. This before-and-after view can tell you a lot.
Of course, the first thing you will notice is the numbers. Has your portfolio grown over time? Has it stayed the same? Or worse, has it gone down? But do not stop at just the final value.
Dig a little deeper.
Pay attention to your Assets Under Management (AUM) and how they have changed over time.
Looking at the trend is more important than looking at a single point. A steady upward movement usually suggests that your investments are progressing in the right direction. It indicates that your portfolio is growing and the value of your investments has risen over time. This could ensure you are on track to meet your financial goals.
If you are paying your financial advisor based on AUM, this metric becomes even more important. As your AUM increases, your fees may increase as well, so it is important to understand exactly what you are paying for and why.
That said, portfolio growth should never be viewed in isolation. You cannot just look at AUM and use it as a criterion for evaluating a financial advisor. You also need to understand why your AUM is where it is. For instance, if your AUM has not grown or has declined, do not jump to conclusions immediately. Look at how the market has performed over the same period.
Was it a tough year for most investors? Were there major economic events that affected returns? If the answer is yes, your financial advisor may not be solely at fault, and the situation may be beyond his control.
This is where a conversation with your financial advisor is advised. When assessing your financial advisor's results, you can ask them to explain the numbers. A financial advisor should be able to clearly clarify what happened, how your portfolio performed relative to the market benchmark, and what they are planning to do in the future to ensure you achieve your goals. If the explanation makes sense and aligns with your long-term goals, that is a sign of a good financial advisor. If it does not, it may be time to ask tougher questions.
2. Check in on your communication with your financial advisor
Communication is key in a professional association like this. Therefore, you need to evaluate your financial advisor by examining how you communicate with them. Communication is what keeps you informed and in control of your money over time. If you feel like the conversations between you and your advisor are confusing, unclear, infrequent, or even uncomfortable, these are not signs of a good financial advisor.
So, how to evaluate a financial advisor's performance based on communication? Here’s how:
You can start with a simple question - do you feel at ease reaching out to your financial advisor? Feeling hesitant to contact your advisor says more about them than it does about you. You should be able to contact your advisor without hesitation and receive responses within a reasonable timeframe. A financial advisor should be open to explaining things patiently and to your satisfaction.
Next, think about how often your financial advisor reaches out to you. Ideally, you should receive regular updates on your investment portfolio without having to reach out constantly. Look for consistency like quarterly reviews, monthly meetings, emails during major market events, and more. As long as you have these covered, you will stay well-informed.
How your financial advisor communicates during difficult market phases also says a lot about them. For example, if your assets under management decline due to a market downturn, this may not be something they can control. But what matters is whether they proactively reach out to explain what happened. You need to consider if they clearly outline why your portfolio dipped, or if you discover it on your own. Transparency during downturns is crucial. The financial advisor should not wait for you to raise concerns. They should explain the situation proactively and let you know the impact on your portfolio. They should also discuss what comes next. Open communication is important, even when the news is not positive.
Lastly, remember that communication is a two-way street. It is not just about what your financial advisor tells you, but also about how well they listen to you. When you share your concerns, preferences, or ideas, your advisor should take them seriously. There may be times when your financial advisor disagrees with you, and that is not always a bad thing. After all, you are paying them for their expertise and perspective. In some situations, trusting their judgment makes sense. However, this should not be the case every single time. If you constantly feel ignored or talked over, this may not be a sign of a good financial advisor.
A financial advisor should explain why they recommend something and listen to your reasoning to reach a decision that aligns with your goals. At the end of the day, it is your money and your portfolio. The final decisions should always rest with you. Your financial advisor’s job is to guide and educate you, but not to undermine you.
3. See if your risk appetites are aligned
Risk and psychology are deeply intertwined in investing, and this connection matters more than most people realize. Every investor has a different comfort level with risk. Your financial advisor’s approach to risk needs to match yours. Problems usually arise when there is a mismatch. Sometimes an advisor may have a higher risk appetite than you and push aggressive strategies. The situation could also reverse. The advisor may be overly cautious even when you are willing to take on more risk.
Either way, if your risk preferences are not being respected, you will not feel at ease with your investment decisions. This is why making sure you are on the same page with risk should be on your financial advisor's performance review checklist.
A financial advisor should be able to tailor your portfolio’s risk level according to your needs. One way to evaluate this is to look at how well your financial advisor manages diversification. Have they helped spread your investments across different asset classes such as equities, bonds, cash, and other instruments? Or are you only investing in one asset? If so, clearly the risk exposure is going to be high, and that is worth questioning.
You should also pay attention to how your financial advisor responds when market conditions change. Does your advisor stay calm and focused on the long term, or do they react emotionally to short-term market noise? You can look at past market downturns and check how your advisor reacted during uncertain periods.
Ideally, advisors should make well-explained adjustments and not sudden moves. Just as importantly, they should also communicate clearly with you during these times and explain what was happening and why.
4. Find out what really motivates your advisor – Commissions or your needs
Another financial advisor evaluation criterion is whether your advisor focuses on commissions or on your needs. You need to know if they are primarily focused on helping you meet your goals or driven by commissions and sales.
To be clear, there is nothing inherently wrong with commission-based financial advisors. If you are working with someone who earns commissions, that is part of the model, and it can be completely fair. The issue is not commissions themselves. The issue is whether the advisor is pushing products simply because they pay them well, rather than because they genuinely fit your needs and risk appetite.
You need to learn how to spot the difference between product pushing and thoughtful advice. For example, let’s say your financial advisor is pushing you towards an Individual Retirement Account (IRA) rollover. An IRA rollover involves moving funds from an employer-sponsored retirement plan, such as a 401(k), into an IRA. It is a common strategy and can benefit you in many ways. But as with all strategies, they do not always work for everyone. This is why, before agreeing to an IRA rollover, the reason for doing it should be crystal clear.
If your money is currently in a low-cost employer plan and your financial advisor is encouraging you to move it into higher-cost investment products, you should pause and ask why. A broker who earns sales commissions may be motivated by the transaction. They would get paid when you move your money. If this move benefits them more and does not make sense for you, it would create a potential conflict you should be aware of.
The same logic applies to mutual funds or insurance-based investments. Look at what has been recommended to you over time. Are the products loaded with high fees or commissions? Look for alternatives and see how open your financial advisor is to those, even if that means they do not earn a commission.
Let’s take the example of Christopher.
Christopher had built a sizeable retirement portfolio over the years and trusted his financial advisor to guide him through the next phase. At one point, the financial advisor recommended moving a portion of Christopher’s money into an annuity. On the surface, this sounded great. Christopher would get a guaranteed income and peace of mind in retirement. Christopher agreed, assuming this was in his best interest.
What Christopher did not fully realize at the time was how the financial advisor was being paid. Annuities often come with high upfront commissions. In this case, the annuity carried a commission of around 7%. So, if Christopher moved $1 million into the annuity, the advisor earned about $70,000 immediately.
The problem was not that annuities are always bad. The problem was that the financial advisor did not clearly explain whether this product truly fit Christopher’s goals, risk tolerance, and retirement needs. The advisor also did not discuss lower-cost alternatives in detail. The focus was simply on closing the transaction.
Later, when Christopher reviewed the annuity's fees and features, he realized it restricted his flexibility far more than he was comfortable with.
The recommendation may have made sense for the advisor’s compensation, but it did not fully align with Christopher’s needs. That is exactly why, when assessing your financial advisor's results, you need to understand whether the advice is driven by your goals or by commissions.
Why regularly evaluating your financial advisor matters
Knowing how to evaluate financial advisor performance is just as important as choosing one in the first place. It helps you understand whether you are working with the right person. When you know what to look for, you can make sound decisions.
Regularly assessing your financial advisor results also keeps you in control of your money. It reminds you that while advisors bring expertise and experience, the portfolio is still yours. You should feel informed and heard about the decisions being made on your behalf. If something feels off, evaluating their performance gives you the push to make a change if needed.
You may explore our financial advisor directory to hire a financial advisor near you who can help you attain your financial goals.
Frequently Asked Questions (FAQs) about how to evaluate financial advisor performance
1. What are the main financial advisor evaluation criteria?
You can evaluate a financial advisor by looking at a few key areas. Start with their fees. Next, review how your portfolio and assets under management have grown over time, keeping market conditions in mind. Pay close attention to their communication style. Also, notice whether their recommendations seem driven by commissions or aligned with your goals and risk appetite.
2. How often should I evaluate my financial advisor’s performance?
A yearly review is a good practice for most people. That said, you can also assess their performance if you sense a drop in your communication, your portfolio seems misaligned, or if your goals change.
3. What are some signs of a good financial advisor?
A good financial advisor should listen to you and take your concerns seriously. Other signs of a good financial advisor include being proactive in communicating. They should also be approachable and transparent about fees. Most importantly, their advice should be centered around your long-term financial goals.