What questions should I ask when speaking to a financial advisor?

This is a question that is asked over and over and there are certainly plenty of articles and responses available on the internet.

As someone who holds meetings with prospective clients, I’d like to offer my take. Below is a list of questions I wish most people would ask of me and my firm and how I believe their answers to be analyzed. Obviously, given my position, this may certainly come off as biased. However, I have a passion for knowledge and sharing it with others. If any reader chooses to take this information to a different advisor, and it’s of any benefit to them, then it was worth the while. On with it then!

1.    Are you a fiduciary?  

Will they treat your money as if it were their own or will they push their own brokerage-owned funds? If you’re paying out to a “Chucky Schwinn” Advisor, and they’ve stashed your money in “Chucky Schwinn” finds…We believe an advisor that receives any income, from clients, outside of an AUM fee should not be considered a fiduciary.

2.    Are they fundamental or technical investors?

a.    Fundamental Investing requires understanding how a business operates, manages its finances, and protects its competitive advantage. It means knowing how big of a slice of the pie your money will buy you.

b.    Technical Investing involves lots of sentiment, patterns, and charts (oh so many charts). Sentiments can turn on a dime and are almost always a gamble. We as humans love patterns and trying to identify them, however, in the history of the markets, the only pattern that truly exists is that of bandwagon buyers and panic sellers. Charts are only capable of displaying information from the past and the future cannot be defined by looking backward.

3.    Will they put your money into mutual funds?

a.    This is a big one and In our opinion, a breach of fiducial duties, but many do it anyway. Why would you want to pay someone a fee, only for them to then place your money into something that will cost you more money in expense ratios? If they truly believe in the holding within that fund, then why not purchase the same share allocation in the open market?

b.    Being in a mutual fund also puts your potential earnings at the mercy of the market. When the panic withdraws happen (and they will), those fund managers are forced to sell holdings at lower prices if not a loss. When the fund loses money, your shares become less valuable as well.

c.    Something often overlooked when owning mutual funds, is the missed wealth-building opportunities of special situations such as spin-offs and acquisitions.

d.    Dividends can be siphoned off and withheld from shareholders to supplement marketing expenses for the fund.

e.    Often, I believe advisors are doing this to be able to say they’ve allocated the funds. But if those funds don’t perform well in the meantime, you’ll miss out when the real opportunities present themselves. Sometimes our clients are paying us to do nothing, and for most people, doing nothing can be very difficult. 

4.    Do you invest in the same things you recommend for your clients?

A large majority don’t. There are regulatory liabilities and audit compliance when buying the same securities as your clients. Additionally, managers may recommend the security of one company for a client's account meanwhile investing in a competing company for themselves. If this is the case, it can be a win-win for the advisor. If the client outperforms, the advisor collects through their fees. If the competitor succeeds, then they’ll find the returns in their own account. If an asset manager has selected the same holdings for their personal accounts as their clients, it shows they have confidence in their selections, and they are truly managing your money as if it were their own.

5.     What exactly is your fee schedule?

a.    A flat Asset Under Management (AUM) fee, aligns your interests with that of your advisor. If they make you more money, they’ll make more.

b.    Larger fees are just as bad as poor returns. The more you’re paying out in fees, the less you will have to invest. 1.35% is typical for large firms (under $1m). lower is great and over is just silly.

 6.    What is your performance history?  

Be sure to get an average annual return over a decent period of time. Just because they returned 20% last year (2021 S&P gained 21%) does not mean they’re a good place to park your money over a long period. Anything can happen in a single year. Your advisor’s focus should be on the long term. Personally, I don’t necessarily want to beat the market in a year that the S&P returns 21%. If you do, I’d be wary about what overloaded bandwagons you’re riding on. Our focus is returning as much as we can in a period of 5, 10, 30, and even 50 years. The compounding effect over long periods is excruciatingly underappreciated. Few and far between do asset managers beat the market over a course of several decades. And again, if you’re paying higher fees, that is cutting into your return every year as well as disrupting your ability to compound!

Additionally, A question I do often hear is, “What are your total assets under management?”. While there is some validity to this question, I think total assets under management are more often a better representation of a firm’s sales capabilities rather than its overall performance. Firms with plenty of assets under management yet less than desirable returns are in no short supply.

If you enjoyed this list, I’d love to meet, buy you a cup of coffee and get to know you. Feel free to contact me with any questions you may have!

Regards,

Chris Landry

703-508-8970

Landry@PacificLandfall.com

Image by Drazen Zigic