Choosing or Evaluating Your Advisors: 3 Mistakes to Avoid

If the recent inflationary economy, high interest rates, and market volatility have caused you to adopt a new or renewed focus on financial matters, you are not alone. Perhaps you are planning to seek help from a professional advisor for the first time, considering changing or re-evaluating your current advisor relationship(s), or simply value a second opinion on your existing strategy. In any case, this article can help you identify and avoid three common mistakes investors make when choosing or evaluating a financial advisor.

1. The Dangers of Reviewing a Firm’s Past Performance

A common mistake many physicians make when evaluating or selecting an investment advisor is placing too much importance on an advisor’s recent returns. Several reasons illustrate why this approach is flawed:

The time frame may be too short. When evaluating an investment’s performance, many clients request gross returns (see Mistake 3) over 1-, 3-, and 5-year periods. However, this amount of data is insufficient to draw reliable conclusions about skill versus randomness—or even luck. In fact, even a 10-year performance window may be inadequate.

Comparisons of results are often misleading.Asking “How did your portfolio perform last year?” may lead to flawed conclusions, especially when portfolios are customized. At our firm, portfolios are tailored based on client-specific factors such as risk tolerance, age, time horizon, tax bracket, and objectives. As a result, Client A may realize a 3% return while Client B earns 20%—both within the same year. These differences may reflect personalized strategies and do not necessarily provide helpful information for a third investor’s (Client C’s) situation. Comparisons are only appropriate when investors share similar goals and financial circumstances.

Past performance is not predictive of future results. Most investors have heard the disclaimer “past performance is not a guarantee of future results.” While often dismissed as legal language, this statement is a fundamental investment principle.

Performance chasing can be detrimental.Attempting to identify the next top-performing asset class or manager based solely on recent returns is unreliable and may harm long-term outcomes.

2. Failure to Reassess and Objectively Evaluate the Relationship With Your Advisors

It is easy to gravitate toward advisors who are friends, family, or acquaintances. Likewise, it is easy to remain in an advisor relationship longer than is beneficial. Consider these factors when evaluating your current advisor:

A transparent and client-aligned business model is essential. Given the industry’s history of conflicts of interest, investors—especially high-earning professionals—should prioritize firms that operate transparently and align their financial interests with those of their clients.

Independent Custodian: Investment firms should not serve as custodians of client assets. Instead, reputable firms use independent custodians to safeguard investments while they manage the accounts. This model offers essential checks and balances, preventing the secrecy that enabled fraudsters like Madoff and Stanford.

Client-Aligned Fee Model: A transparent, fee-based compensation model ensures that clients pay a defined percentage of managed assets, unlike traditional commission-based structures. This model better aligns advisor incentives with portfolio growth and offers greater clarity on advisory costs.

3. Ignoring What You Keep

Many investors fixate on advisory fees and expenses when evaluating financial advisors. While these fees can range from 0.5% (for large portfolios under fee-based models) to as high as 3.0% (for mutual funds and broker transaction costs), taxes often represent an even greater expense.

Tax burdens on investment portfolios depend on multiple factors, including asset types, turnover, state of residence, account structure, and overall income.

Physicians, who often fall into the highest tax brackets, must prioritize tax management regardless of market conditions. Unfortunately, mutual funds typically provide only IRS Form 1099 and lack personalized tax guidance. Similarly, most brokers, managers, and advisors—including those at major firms—do not offer tax planning due to compliance restrictions.

Effective tax advice may include strategies to reduce tax liability from transactions or build portfolios with greater tax diversification. Yet, many firms do not provide this essential guidance.

What ultimately matters is not your gross return but your net after-tax return—the figure that truly reflects financial progress.

Conclusion

We encourage dermatologists to monitor their financial plans continuously and regularly evaluate their advisors. By focusing on the factors outlined above, you can select the right advisor for your unique circumstances or objectively reassess your existing relationship(s).