🔒 Financial advisors protect us from ourselves – With insights from The Wall Street Journal

However, advisers themselves can get carried away, especially at times like these, when markets are awash in liquidity and speculation seems unstoppable. Now is an ideal time to check in with—and check up on—your advisers. Before it’s too late, make sure they can manage not just your emotions, but their own.

I have no doubt the best advisers are good at keeping their clients from bailing miserably at market bottoms and buying euphorically at the tops. But advisers are human, too.

During the 2008-09 financial crisis, brokers and financial planners often sold their clients’ stocks as the market fell—even though, if their hands were steady, these professionals should have been buying.

At least four studies, in Canada, Germany and the U.S., have found brokers and advisers often chase what’s hot and dump what’s not, much the way unadvised individuals do.

Bitwise Asset Management Inc., a cryptocurrency investment firm, recently surveyed nearly 1,000 financial advisers and brokers. It found that 17% of those who don’t already put clients’ assets into digital currency say they will probably or certainly do so in 2021, up from 7% last year.

Why? About a quarter of advisers said “clients are asking for it,” nearly 30% said they want “something new to offer clients,” and 38% cited “high potential returns.”

As you become more comfortable with an adviser over time, you can become more trusting. A new academic study finds the longer clients have stuck with a particular adviser, the less likely they are to sell after poor performance—but the more likely they are to buy risky assets after a sharp rise in their portfolios.

“That’s exactly the kind of behavior that might encourage an adviser to get you to double down on risk in good times,” says Alessandro Previtero, a finance professor at Indiana University and one of the authors of the study.

What should you watch for to make sure neither you nor your adviser will get swept up in speculative fever?

Become attuned to what William Bernstein of Efficient Frontier Advisors LLC, an investment firm in Eastford, Conn., calls “overpromising.” That’s any recommendation boosted by talk of hefty potential returns or boastful projections. Examples: “We can avoid down markets,” “I can get you a yield of 5% (or more) on safe assets,” “the upside is huge.”

Be on guard for advice that strays from what you’re used to. If you’re suddenly hearing buzzwords and being urged to add structured products, SPACs, IPOs, “crypto” or the like, stop the conversation.

Then ask how your adviser has determined what kinds of risks you should be taking and why, says Margaret Franklin, president and chief executive of the CFA Institute, a nonprofit association of financial analysts. She suggests saying, “Tell me again: What problems am I trying to solve, and how does this help solve them?”

Ms. Franklin also urges asking: “Tell me about a situation where you pulled a client back from wanting to do something that’s in the news every day.” A good adviser should immediately be able to describe talking several people out of scratching the latest speculative itch.

Charlotte Beyer, author of the book “Wealth Management Unwrapped,” points out that you should already have an investment policy statement, or IPS. This document spells out your portfolio’s objectives and how the adviser will allocate your assets to achieve them.

Any IPS “needs to state the limits on how big a position can be or become,” says Ms. Beyer. If you’re hearing recommendations that sound speculative, ask whether they violate the terms of your IPS. If buying them entails selling other assets, inquire how that meets the definition of “rebalancing” in the IPS. (If you never got an IPS, get a new adviser—pronto!)

Recent history also comes in handy, says Allan Roth of Wealth Logic LLC, an investment adviser in Colorado Springs, Colo. Look at your statement from March 2020, after the pandemic sent markets into freefall, and see whether your adviser sold bonds to buy stocks—or vice versa. Anyone who dumped stocks then is unlikely to be able to resist the pull of speculation now.

Ask to see your adviser’s own portfolio, says Prof. Previtero. Those who take more risks themselves tend to recommend more aggressive portfolios for their clients. If you’re hearing that you should raise your stock allocation or buy buzzy new assets, find out whether your adviser has already done the same.

People who’ve been jacking up their own risk might not be the best match for you.

“I can’t tell you how to get rich quickly,” the Hungarian stockbroker and trader André Kostolany liked to say. “I can only tell you how to get poor quickly: by trying to get rich quickly.”

Now is the time to guard against advice that ignores that wisdom.

Write to Jason Zweig at [email protected]

Appeared in the May 8, 2021, print edition as ‘Your Adviser Might Need an Intervention.’