Talking to your adviser feels like this when you don't have the right questions:
1) What does this cost?
2) How much have I made?
3) How do you make Investment Decisions?
Let’s face it, you don’t want to spend time thinking about your Financial Advisor.
You likely use a friend of a friend who works at a well-known firm. You’ve ridden the market highs and lows with this Advisor. Everything appears about as good as it can be.
Even if you were feeling uneasy, how would you find another professional to work with? Where would you start? How could you know if the alternative is better than what you have? What if a new Advisor is worse?
So how can you evaluate who you are working with?
Three simple questions. Each answer requires plain language and an easy to understand, non-finance degree required response.
What does this cost?
Why ask? - Financial Advisors charge fees to manage your accounts. What many do not realize is there are also fees inside the investments your Advisor chooses to put into your portfolio. They exist, but you just don’t see them. If you tack on a number of different investments plus other investment products (like annuities), you can really begin to see the fees you’re paying increase greatly. The whole picture can become convoluted and extremely difficult to calculate your total cost.
Keep in mind that many similar investment products have vastly different fee structures. Plus, what may sound small in a fee differences (1% let’s say) can become a large number over time.
Answers we often hear – The Advisor provides an estimate that is inaccurate, or takes months to respond to you, or the Advisor never actually answers the question.
And the right answer is? – The Advisor should be able to provide you the fee being charged for Advisory services and the fee for the investments used in your portfolio. Giving this answer should be easy for the Advisor. Managing investment costs is the simplest way an Advisor can provide value for you.
How much have I made?
Why ask? – While fees are a hot topic, the only number that matters is how much you make! Returns will drive you towards meeting your goals. This is the whole reason you’re investing in the first place.
Ask your Advisor what the compound annual growth rate of your account has been. This is a finance term, but your Advisor should know it. Basically, it’s the rate at which your account is growing each year on average. During the financial planning process, this rate is used to determine how much and how long you need to save for your goals.
Answers we often hear - “All investors have different goals and time horizons; returns will be very different.” Or the Advisor will start to describe current market returns. Clients are left with the impression that the market, not the Advisor, is driving returns. What’s more troubling is Advisors that do not provide this information on a regular basis or struggle to answer the question.
And the right answer is? – A number, any number! You want your Advisor to be able to explain your returns and how they will help meet your goals. Just “beating the market” should not be the number you’re looking for. You also want to understand how your investments have performed in different types of markets. For example, how have your investments performed in poor markets (like 2008)?
How do you make Investment Decisions?
Why ask? – Contrary to what you may believe, most Advisors outsource the actual management of your investments. While there is nothing wrong with utilizing outsourced managers, your Advisor should deeply understand the investment strategy being used. We worry most about Advisors who do not understand how investment decisions are being made and instead rely on the track record of the investment manager or name of the investment firm. This simply isn’t good enough for your money.
Answers we often hear – “We follow the market” or “We use top performing mutual funds/managers”. Neither of these answers are an actual strategy. Follow up questions could include: What happens when these investments underperform? How did you pick these mutual funds in the first place? Why did you buy that investment? When would you sell an investment? Probing on strategy, it seems traditional Advisors don’t have one at all.
And the right answer is? – Here’s our strategy. At Insight, we follow a rules-based, systematic investing approach. This may sound fancy, however we can write the rules on a napkin and explain it to you! It’s the same strategy in every market, all the time. We know when we’re going to buy, when we’re going to sell, how much we’ll invest in each individual holding in your portfolio, what we’ll do in good markets, and what we’ll do in bad markets.
Every Advisor should know this and be able to explain it to you. If they outsource it to someone else, they should have a deep understanding of the company they’re using and that company’s rules for managing your money. We don’t think that’s asking too much!
Call to Action!
Want the right answers to these questions? Schedule an appointment with us. Head over to our facebook page and click request a time.