My financial adviser told me my investments were ‘inflation-proof,’ but then my account fell 20% — and he ‘was never able to explain the accelerated loss of money.’ What’s the right move?

Updated: July 1, 2022 at 6:22 a.m. ET

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Should you ditch an adviser who can’t clearly communicate losses. to you? Getty Images/iStockphoto

Question: I went through a 20% loss with my investments at a big bank. I was told by the adviser that my portfolio is made up of inflation-proof domestic and foreign investments, but the advisor was never able to explain the accelerated loss of money. I closed my account. Was that the right move? (Looking for a financial adviser? You can use this tool to get matched with a financial adviser who might meet your needs here.)

Answer: Your instinct to move away from this adviser was likely the right one, pros say. Indeed, Michelle Connell, chartered financial analyst, says your adviser’s inability to explain your losses is something she finds concerning. And the fact that this adviser called something ‘inflation-proof’ may have been a warning sign too. “There are very few things in the market that are completely safe or inflation-proof,” says certified financial planner Jay Zigmont. Wealth adviser Bruce Tyson at Morton Wealth adds that, on the plus side, now you will know to “ask harder questions when an adviser claims that an investment is ‘something-proof.’” 

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To be sure, a recent 20% loss isn’t unheard of. As of mid-June, the S&P was down about 20% from its highs in January. But that said, a good adviser would have explained all of that to you, and also clearly explained what you’re invested in. What’s more, a good adviser would likely have had a better understanding of your risk tolerance — if that kind of loss was unacceptable to you, you may have been invested too aggressively in growth.

Tyson says in the future, you should work with an adviser to build a resilient portfolio rather than one solely focused on growth. “Ultimately, your adviser should be doing more education, more cash-flow planning and more tax planning for you so you would have a total picture of your money and less anxiety around price movements in your account,” says Kaleb Paddock, certified financial planner at Ten Talents Financial Planning. You can use this tool to get matched with a financial adviser who might meet your needs here.

But was it the right move to close the investment account? Certified financial planner Jay Zigmont says the bank account isn’t what’s most important, but what you are investing in is. You could have left the money where it was and switched to a new adviser or you could have moved the funds to a self-directed account if your preference is to have more control over your investments.

And “the question is, what did you do with the money after you closed the account, says Zigmont. Closing an investment account can be costly if your gains are higher than your losses and you might be subject to paying taxes if you sell holdings less than a year after purchasing them. Additionally, many firms charge a fee to close an account, so you’ll want to check the fine print in the terms and conditions of your account to know what you should expect when closing a brokerage account.

So what should you do next? “It sounds like the adviser may not have been a good fit for you, but the challenge is to find one that is,” says Zigmont. In terms of what to look for in an adviser depends on your needs. “A good financial planner can add value well beyond the management of the investment portfolio,” says certified financial planner Ian Rea of Slate Peak Financial Services. This Marketwatch Picks guide can help you formulate a list of questions to ask a potential adviser.

Do some research before you hire your next adviser and make sure they have enough investment knowledge to navigate during investment market downdrafts. “Then interview the qualified candidates and determine if they develop an investment plan that will help you reach your goals within your risk tolerance. Also, make sure they communicate when market conditions are tough and most importantly that you trust them,” says Connell.

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Alisa Wolfson is a reporter for MarketWatch Picks.

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