In its December 16, 2013 wealth management section, the Wall Street Journal published a piece on evaluating your financial advisor, by focusing on selecting the right investment benchmark to measure the advisor’s relative performance.

There are a number of significant problems with this, but we’ll focus on just two of the biggest ones here.

Wrong Job Description.  First, the article defines a financial advisor as purely a portfolio manager.  In our view, a professional who only manages money is not a financial advisor, but an investment advisor or investment manager.  A true financial advisor integrates the management of your investments with the other aspects of your financial life – like estate planning, risk management/insurance, tax planning, retirement planning and more – to provide you with a holistic view.

Wrong Basic Assumption.  The article assumes that you should be looking to find an advisor who can consistently beat the (correct) benchmark for your portfolio.  In our view, trying to identify active managers who can consistently generate alpha – or risk-adjusted return in excess of the benchmark – is a fool’s errand.  It is extremely difficult to distinguish luck from skill when evaluating active managers.  In addition, as dozens of academically rigorous studies have shown over the past four decades, most active managers under-perform the market – in good times and bad times.  We believe that an investor’s focus should be on determining a suitable asset allocation (recognizing that the asset allocation decision is arguably the most important determinant of investment performance), and then on implementing that allocation in the most cost-effective and tax-efficient manner.