Can your financial adviser pass these tests?

A poor mark in any of these key areas is cause for concern.

Financial advisers are under more pressure than ever to keep your business. The Internet has made loads of detailed-and often freemarket data available to investors. It has also enabled them to trade stocks online cheaply and easily. These developments are pushing advisers to provide even higher levels of service than in the past, when clients had to depend on them to get the inside scoop on companies and to execute their trades.

The growing influence of the Internet is fortunate for you, because it means you should expect more from your adviser than periodic account statements, a quarterly newsletter, and a holiday greeting card. That said, let's examine three key things your financial adviser should provide.

An investment-policy statement. Your adviser should give you some sort of document demonstrating that he understands you and your tolerance for risk. That document should also spell out how the adviser plans to manage your account and help you achieve your financial goals. It should explain the investment style (growth- or value7oriented, conservative or aggressive) and make clear the level of control you've agreed to hand over: Must the adviser consult you before every purchase or sale, or does he have your permission to make moves without your consent? How soon will the adviser invest money you add to your account? How often will you receive written portfolio updates?

Although your adviser will do many of the same things with every portfolio, the investment-policy statement should emphasize that he or she acts differently in areas that count for you. For example, does he know that you prefer to invest in socially responsible companies, or that you own a lot of real estate and therefore wouldn't be interested in buying shares of real estate investment trusts? Does she know how you feel about riskier investments, like junk bonds, options, and international small-cap stocks?

Clear, open lines of communication. A good adviser will tell you up front how he's to be compensated (commissions, fees, or a combination of the two). More important, he'll educate you about different types of investments and why he thinks particular ones might benefit you. He'll also explain his investment philosophy and will inform you about shifts in his thinking-without your having to call him first. You should meet with your adviser at least once a year, and be able to talk about your account at any time. Phone calls should be returned promptly and courteously. Consider it a bad sign if you hesitate to call because you feel the adviser is too busy or will view your call as an intrusion.

Will handing over more assets to an adviser earn you better service? Not necessarily. A retired surgeon once asked me to review his $4 million portfolio, because he was unhappy with his relationship with his adviser. The two didn't communicate at all, and the surgeon thought that his portfolio was doing poorly. It was quite the opposite, I discovered, but this doctor deserved to hear that from his adviser. I sent him home with instructions to demand an ongoing dialogue.

Comparisons with market benchmarks. At least every three months, you should receive a report showing how well your investments are doing compared with their respective benchmarks. For the large-company growth stocks you own, the benchmark might be the Standard & Poor's 500 Stock Index; for your small-caps, it could be the Russell 2000 Index. Your adviser might even prefer to create a "blended" index, a figure that presents a fair comparison with the types of assets in your portfolio and how risky they are. By identifying either separate benchmarks or an overall figure, you'll have a gauge by which to measure how well your investments-and, by extension, your adviser-are serving you.

Don't be too quick, however, to dump your adviser after several months of poor returns relative to your benchmarks. If you're getting quarterly reports and feel that you and your adviser have good rapport, I recommend that you examine the investments' performance over one complete economic cyclefrom bull market to bear market and back again. By bear market, I mean a significant one-a drop of at least 25 percent in the stock market, lasting for more than six months. During this cycle, the economy generally should have had at least one recession.

We haven't had anything close to a real bear market since 1987, nor have we had a recession since 1991. But over time, recessions and milder bears, at least, seem to occur once every five years on average. So that's a more realistic time frame for evaluating your adviser's overall performance. It's important to be patient with your adviserespecially if he's a value investor preaching the buy-and-hold gospel, because in recent years value has lagged behind growth. We won't know how well value stocks will do until the next bear market, a period that generally bodes well for value investors, who buy depressed stocks at bargain prices.

Even the best-educated, most experienced advisers won't beat their benchmarks every time. But if yours fails to live up to expectations for more than a year or two, be sure to ask some questions: Has he changed his approach to investing? Is she being truthful regarding any potential conflicts of interest between the products she sells you and how she's compensated? If you're not happy with the answers you get-or if the level of service you've become accustomed to drops off-look for someone else, using the criteria in this column as your guide.

[Author Affiliation]

The author, a fee-only Certified Financial Planner, is president of L.J. Altfest & Co. (www.altfest.com), a financial and investment advisory firm in New York City. This column appears every other issue. If you have a comment, or a topic you'd like to see covered here, please submit it to Investment Consult, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1472. You may also send a fax to 201-722-2688 or e-mail to meinvestment@medec.com.