To properly calculate the effectiveness of your investment portfolio -- what your "real return" is -- you should to do a very basic and simple calculation: add your growth and income (dividends plus interest) then subtract management fees, investment fees, taxes and your cost of living increase.
This analysis will allow you to determine if you are gaining or losing purchasing power.
Most investors rarely include all of these when determining if their financial advisor is doing a good job for them. Being on the front line, working with clients everyday, I am shocked at how many advisors rarely ask their clients what their cost of living increases are every year.
We all know that the consumer price index statistic is a trumped down number and is usually a third of what the real increase in living most Americans experience annually. Accepting this figure on its face, I believe, is one of the country's greatest downfalls.
Financial advisors often promote themselves as caring and knowledgeable people who always have their client's best interest in mind. So, here is the question you should ask your advisor: how can you do your job properly if you don't truly know what I really need to make each year just to stay even?
It is time for all of us to look in the mirror -- clients and advisors -- and drill down to what the ultimate goals are for managing portfolios. Clients need to hold advisors accountable for their recommendations (specifically, what the targeted return trying to be achieved is, and why) and advisors need to get to know their clients better.
The blind leading the blind will get you nothing -- except a loss of purchasing power.
Ed Butowsky is an internationally recognized wealth manager. His upcoming book titled "Are You Committing Financial Suicide?" is expected to be released this spring.