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The Ten Most Commonly Overlooked Questions You Should Be Asking Your Advisor

Financial advisors are there to provide you information and guidance that is not always readily available.  They are there to guide you, and hopefully, as is the case with most of them, they have your best interests in mind. However, ultimately your present and future financial well-being is in your own hands, and sometimes it is difficult to know whether you are positioned in the most efficient way possible to achieve your goals throughout your retirement. The following ten questions are a good jumping-off point for you in your next conversation with your advisor, as they cover areas that might not come up in most meetings, if ever:

  1. Do you have targets for each account? Early in your career, the goals for investing were straight-forward and simple: grow your accounts as much as possible to have what you need for retirement.  However, as you enter the phase of your life where you plan to actually utilize those accounts, the strategy requires a little more nuance.  If your dream retirement requires you to earn 6% per year in the accounts you have invested, then why would you take the requisite risk necessary to earn 15% or 20%?  Keeping the purpose of those accounts in focus will allow you to keep your risk and your volatility in your portfolio down, and increases your chances of success.
  2. Are you paying front or back-end loads? Many funds charge commissions when you buy in, front-end loads, or commissions when you sell out, back-end loads. Often these commissions are 5% of your position or higher. Just as with the previous question, these commissions are of less concern when you are working and simply in a buy-and-hold pattern for decades at a time – it can even help you save on annual fees. However, retirement requires a more actively managed account to allow you to avoid large draw-downs in the market when they occur. It can also create a conflicting incentive for the person managing your account who might get paid simply for moving you into a new fund. If you are subject to payment on future loads, understand why those funds were chosen over other options that may not carry a commission.
  3. What triggers a change of position in your holdings? It is not at all uncommon for investors to receive a statement, see that they have been reinvested to new funds, and not understand the impetus for the move (did you pay another front-end load when moved?). While it may not be important to understand every investment decision your advisor is making, understanding the overall strategy behind investment changes is critical. If there is not a written out set of rules dictating when a position may be changed, then emotion or gut-feeling is at least a partial variable in making those decisions.
  4. How correlated are your holdings? A quick glance at your portfolio may reveal that you are invested in 20 different funds, and as the market has been generally positive for the last seven years or so, it has been easy to assume those 20 holdings means your portfolio is well diversified. However, any licensed company can create a fund and they use the same data in their analysis of which holdings to place in their fund as everyone else. If you have Fund 1 made up of holdings A, B, C, D and E, and you have Fund 2 made up of holdings A, B, C, D and F, despite being two separate funds, they are going to perform almost identically when the market goes up, and when it goes down. Decreased correlation decreases volatility and helps to make your portfolio more predictable.
  5. Do you understand the expense ratios within your holdings? Companies who create and manage funds (whether ETF’s, Mutual Funds, Index Funds or something else) all charge what are referred to as “expense ratios.” These expense ratios generally range between 0.1% and 2.0%. As was mentioned in the previous question, often, multiple funds can be used to target the exact same holdings or sectors. Why would you pay more for the same returns? Because expense ratios are often not brought up when discussing “your fees” as they are removed before the fund return is reported, this is an easy area to overlook.
  6. What is the standard deviation on your investments? If two funds each return a 7% yield over the course of a year, the return alone does not make them equal. Individual investments have what is referred to as a “standard deviation” which calculates the dispersion of a particular data-set from its mean. In other words: it quantifies how volatile a particular investment has been historically. Low standard deviations in a portfolio mean that the portfolio is more likely to deliver returns within a defined historical average. For example: Fund 1 may have returned 7% in year one and 7% in year two, while Fund 2 may have returned 20% in year 1 while returning -13% in year two. Both Funds 1 and 2 average 7% over the two years, but Fund 1 is more likely, historically, to deliver an even, non-volatile return, which, in turn, helps with accumulation and predictability.
  7. Are you getting value for the fees you pay your advisor? This may come as a shock, but very few investment pros have anything to do with whether the market went up or down last quarter. It is a mistake to assume that a positively returning portfolio means that the fees you are paying your advisor are providing you with value. It is important to have a benchmark constructed showing you an approximation of what the market returned INDEPENDENT of your advisor and then compare it to the portfolio you are paying your advisor to manage. If there is no improvement, you aren’t receiving value for your fees.
  8. Is your portfolio invested with potential tax consequences in mind? Different accounts can be invested to achieve various rates of return depending on how aggressively you are positioned in the market. If you are not careful, it is actually possible to grow your IRA’s to quickly and to place yourself in a position of having to pay thousands in unnecessary tax dollars for money you don’t need once your RMD’s come due at 70 1/2. Does your investment strategy take the reality of RMD’s into consideration when deciding which accounts to invest aggressively?
  9. Are your investments allocated according to your anticipated withdrawal order? Walking hand-in-hand with the previous question, this question asks whether or not the manner in which you are invested takes into account the order in which you anticipate withdrawing from each. For example, if you have a non-qualified account, an IRA and a Roth account, and you plan on taking money from the Roth account last, it may make more sense to keep that account more aggressively invested as its longer time horizon allows more time for it to recover in the event of a market drawdown.
  10. Have you had a conversation with your advisor about the services they do not provide? Everyone has heard the phrase “Jack of all trades, master of none.” It is almost impossible for one person to provide professional and expert advice in every area you need to address in your retirement planning.  Unfortunately, many advisors position themselves as providing “complete” services all the same. Are you getting the help you need in the areas of insurance, Medicare, long-term care, tax preparation and estate planning? Have an honest conversation with your advisor about which areas may require outside help, and ask whether they have a network of people you can be referred to in addressing those concerns.
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