How you should measure the performance of your financial advisor (Part 2)

No, I didn't split this blog post into two different days just to make you click more. Did you miss How you should measure the performance of your financial advisor (Part 1)?

I may be in the minority, but I think the most important thing a financial advisor can do is convince you to invest a portion of your income. I think an advisor should make a compelling case as to why she should have your income, and you shouldn't. This isn't as nefarious as it may seem. So many clients and advisors get caught up in what to do about current investable assets. In other words, everyone involved cares way too much about money that has already been saved. Don't get me wrong, you shouldn't jack around with money you've already saved. Your advisor will prove her worth by how she invests your already saved assets. We discussed this yesterday. But your advisor will prove she's worth a damn by tapping your most valuable asset: your income.

Think of every financial billboard, commercial, or print ad you have ever seen. What do a majority of them say? Well, it's my experience that a majority of them say "We can help you with your rollover". Meaning they can help you invest your old retirement plan. Or, they can help you invest money you've already saved. Great! Who couldn't do that? A great financial advisor will emphasize the importance of saving your current income, not just invest the money you've already saved. Does she get paid nearly as much to invest your current income? No.

Therefore, the second measure of how to determine whether or not your financial advisor is worth her khakis is whether or not you accomplished anything financial with your current income.

2. Performance in relation to your income being used toward your financial goals- I'm not suggesting I just discovered electricity here, but I'm pretty sure this is a brilliant measure. Did your advisor convince you, with all her knowledge, degrees, and tools, that she has a workable plan for a portion of your income? And if she convinced you, did you give it to her and accomplish anything? If you can say yes to both of these questions, I would argue that you have a hell of an advisor. The financial industry likes to argue with itself whether or not it's a sales industry. It is. The sale occurs when the advisor, with all her esoteric insider know-how, sells you on the concept that your income is valuable. I don't care how an advisor is compensated, or whether or not she thinks she's in sales. Her job is to sell you on the idea that you should use your current income to accomplish your financial goals.

If your current advisor hasn't ever addressed the use of your income, then what is she really doing? Is she simply weighing in on the money you've already saved? What value is that? An index fund could do that. I firmly believe you should measure your financial advisor on how much or how little she addresses your current income. Some of this money will be used to buy life insurance, but a vast majority of this income should be used to save for emergencies, your kids' college, and/or your retirement.

Or, there is one other option. One option so outlandish, that you know it's good. Your advisor can help you use your income to reduce your debts. You see, if advisors were significantly involved in your personal finances, then they would be able to not only convince you, but motivate you to pay down your consumer debt. Your net worth calculation proves this. If your advisor convinces and motivates you to pay off $5,000 in consumer debt, then she's had the same net effect on your net worth as convincing you to save or invest $5,000.

An additional note

You are stubborn. Don't take offense at this. You are. We all are. If you don't save money or pay off debt, it's your own damn fault, not your advisors. But there are financial advisors that can help you see the light, while others just use a crap-load of color laser cartridges to print 60-page plans that never see the light of day. Your advisor is a brutally important person in your life. If he/she isn't, then you might not have a good one. As you've seen over the last couple of days, you can evaluate them via market performance and you-based performance. And if she can't beat the market, she sure better be able to beat your income out of you.