At least once a year a prospective client will sit across my desk and begin our conversation saying, "I'm disappointed with the returns my current advisor has generated in my accounts and I'm thinking about switching." "Tell me more," I'll respond. Most often, the prospect will then talk about how the S&P 500 returned some percentage the prior year and his (or her) portfolio returned less than that. I'll ask to see the client's account statement, which they'll happily pass over, and I'll take a look.
More often than not, the portfolio actually looks okay. Usually, I can quickly spot why the portfolio returned less than the S&P 500; in short, because it wasn't invested in the S&P 500! Yes, it held some S&P 500 index funds, but it also held international stocks, small cap stocks, emerging market stocks, bonds, etc., etc. In short, it's a well-diversified portfolio.
I'll then ask the prospective client how they requested the advisor invest their money? "Well, we agreed on a moderate risk portfolio," they'll say. Ah, "moderate risk," I'll nod. Then I'll tell them that I'm not sure it's fair to compare the returns of their advisor's "moderate risk" portfolio with the S&P 500 which, in short, would be a 100% equity, or "aggressive" portfolio. I'll mention that most advisors will diversify a moderate portfolio with some international stocks, bond funds, and perhaps commodities, among other things.
At this point in the conversation most people will "get it." They'll remember that moderate risk means, well, moderate risk; that they've heard the best sustained returns, over time, are achieved with diversification, and that when they asked for moderate risk, that meant not getting the same returns as the market in the good years because they didn't want to risk large losses in the bad years.
Where am I going with this? I'm headed to a reminder of two things. First, that while being diversified usually works best, it hasn't in the last 15 years. U.S. large cap technology (read: Microsoft, Apple, Amazon, Google, etc.) has crushed every other sector of the market for a while now and while it's extremely unusual for one sector of the market to perform so well for so long, it's not impossible. Second, that it's important to use appropriate benchmarks when evaluating performance. If you ask for a moderate risk portfolio, say 60% stocks and 40% bonds, then it's simply not fair to compare your portfolio's returns against those of the S&P 500, a 100% stock portfolio. Instead, consider using funds such as AOK, AOM, AOR and AOA. These come from a family of Blackrock investment options which mimic different levels of risk in a diversified portfolio and act as much better choices for benchmarking. These funds, or a blend of them, incorporate all sectors and geographies of the market, just as most any good financial advisor will.
So, before getting too upset at what you may perceive to be an underwhelming job by a financial advisor, first make sure you're comparing the result achieved with what you actually asked them to do!
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