The 10 Questions You Need to Ask Your Financial Advisor ASAP

I may earn money or products from the companies mentioned in this post.

This is a common problem I see with all of us millennials. Nobody takes the time to stop and think maybe they should spend some time learning where their money is being invested. I had my closest friend ask me one night when we were out if I was saving any money since I moved out of my parents' house. I was like “uh yea of course, I have my 401k contribution automated and make myself save at least $500 a month.”

 

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He didn't even know what a brokerage account was..So I explained to him all the options you have and how you usually have a financial advisor assigned to you to help you out along the way. This was literally the night it hit me I knew more than the majority of my friends and family. It was insane to me. All I did was read books on the train!

As soon as you get a job and start saving your money, you need to open an account at a brokerage firm. The top brokerage firms in my opinion are Charles Schwab and Vanguard. Both provide extremely low fees with phenomenal service.

Nevertheless, you should still be looking to ask questions regardless of the reputation of the firms you're considering.

Just be aware, if you think you know how to manage your own money without guidance from an advisor, let your brokerage firm know. I unknowingly paid an annual fee of $300 until my dad told me. So if you think you can invest smartly on your own, waive the fee.

Nobody is going to be more concerned about what happens to your money than you. Taking care of your money is like taking care of your lawn, garden, house, etc. Nobody is going to put as much care into it than you.

Okay, here we go:

The 10 Questions to Ask Your Advisor:

 

1. What is your investment philosophy?

Your advisor's goals need to be aligned with your goals. Or else, you may find when you regroup next year, you had a completely different idea on how your investments were being handled. You might think it was obvious your investments were supposed to remain exclusively out of mutual funds and remain in index funds.

Instead of avoiding the trouble and expense of having your money being traded in and out of mutual funds, building up fees, this is exactly what was going on!

The next thing you know, you're invested in five different mutual funds, all of them with fees over 1%. I can't tell you how many times I've seen this. This happened to me! Before I did my due diligence, I was getting screwed over on mutual funds that had net expense ratios reaching as high as literally 1.74% (fee for what it costs to manage the mutual fund).

For comparison, an S&P 500 index fund can have fees as low as .05%. This is because an index fund tracks a specific index like the S&P 500 for example, and mimics the performance. No management is needed, so the fund is cheap, which advisors hate. Do your homework! The worst thing you can do is pay unnecessary fees all because you didn't ask what your advisor's investment philosophy was.

 

2. Do you use stocks or bonds?

Pay very particularly close attention to the answer your financial advisor gives you and the reasoning for it. If he says he uses even a sliver of his allocation of your money for bonds, STAY AWAY. I know it sounds unconventional to stay away from bonds, but trust me they're terrible if you want to plan on retiring one day. Never under any circumstance should you invest in bonds. Bonds are actually extremely risky, because they are way too vulnerable to inflation compared to stocks.  Consider them the equivalent to cash.  Unless you see the 10 Year Treasury Yield rise to 14.59% like they did in 1982, don't ever put your money in bonds.

The average rate of inflation lies around 3%. Now that might not sound so bad, until you realize prices double every 20 years. So for all you 25 year olds out there, prices will double twice in your working career, if you plan on working to at least the age of 65. How much does that suck?

Stocks have outperformed bonds with an average rate of 10% since 1926 vs an average performance between 5%-6% for bonds. After taking into account for inflation, you have a 7% average performance for stocks and a 2%-3% average performance for bonds. Think about how bad that is for a second. That's not just 4%-5% worse (which is still a huge amount), it's up to over three times worse of a performance. If you invested $10,000 in an S&P 500 index fund in 1926 if it existed back then, you would have $64,287,573.60 even without dividends reinvested today. If you had invested in bonds and received a 6% average performance, you would have $2,128,823.25 today. If it was a 5% performance it would be $890,052.27.

Repeat after me: “I will never, ever put my money in bonds.”

Cool, thanks. I feel a lot better now. I can't stress this enough. Anytime you hear your advisor talk about allocation, do not let him casually slip in the word “bonds”. There is literally no point because it will eat at your performance. Bonds aren't safe, they are risky. Get that ingrained in your head.

The new bonds are index funds. If you want to invest safely, put all of your money in low-cost index funds. For those of you that don't know, I'll give you a brief explanation since I've written a few times about index funds in the blog.

Index funds are nothing more than a type of mutual fund. BUT, the way they differ is an index fund tracks a specific index such as the S&P 500, for example. What this means is the index fund owns a little piece of each of the stocks in the S&P 500 to mimic the performance of it. The index fund does no better or no worse. You simply match the performance of the index and sit back and relax.

Ladies and gentlemen, that is how you invest intelligently. Forget about bonds. If your advisor wants to invest a portion of your money in bonds, then you need to politely tell him or her you both are not a good match and move on to someone who will put you and your money's best interest forward.

 

3. Do you try to time the market?

Oh man, if your advisor says yes, they are either kidding themselves or are the greatest BS artists to grace this earth. You may as well say nothing else, get up and walk out the door.

Nobody, and I mean nobody can predict what will happen tomorrow let alone in the next 3 months. The perfect example of this I can remember was one time I was watching this show on MSNBC called Mad Money with this guy Jim Cramer, if you've never heard of him. If you look at his Wikipedia page it says his fund returned 47% in 1999 and 28% in 2000. It's just funny because everyone was making money in those days, so who cares.

Anyways, long story short, I started following a few of the stocks he picked and basically, they all had mediocre returns at best. The best trick people like him have is they immediately move on to the next stock, so you get distracted and forget what they previously predicted.

They have you repeatedly take their word for it even if you didn't invest in whatever stock they predicted last time. It's just ridiculous, it's impossible to time the market.

The best example of how unpredictable this is, is about someone Benjamin Graham likes to call Mr. Market. For those who don't know, Benjamin Graham was Warren Buffett's teacher. You can find his book, The Intelligent Investor in my recommendations page. It's one of my all-time favorites.

Ben Graham likes to describe Mr. Market as:

1.Emotional, moody and irrational

2. A voting machine in the short-term and in the long-term, a weighing machine

3. There to serve you, not guide you

4. Offering you a chance to buy low and sell high

Here is a perfect real life example of how crazy irrational the market is and how better off I was not trying to time it and ride the market out for the long haul.

Back in October of 2016, annual profits fell for Apple for the first time in 15 years. The market freaked out and the stock dropped something like 7% within a month. Even better, back in April of 2016, the stock dropped from $109 to $89 in May of 2016, and I kid you not, it was for no other reason than investors became impatient saying Apple lost their edge.

The last time I invested in a stock other than my 401k S&P 500 index fund was back in 2016 when Apple was at $96. This was over a year and a half ago. Even when there were dips I kept my money in because I had no idea what was going to happen tomorrow. The best part is, as of right now in December of 2017, my performance is at 27.83% for the year vs. the S&P 500 index's 22.29%.

This is because I leveraged my investment in the S&P 500 index fund with a phenomenal company that has  a great balance sheet. I don't care to look at timing the market and what will happen in the near term. At one point, I was down 25% with Apple, because before I read all the books in my recommendations page, I bought at the high.  But I knew if I stuck it out, because it is such a great company, I would benefit.

 

Here is one last mind-blowing piece of history for ya.

If you had tried to time the market between December 31st, 1993 and December 31st, 2013, here are the results you would have seen:

-Fully invested: 9.22%
-Missed 10 best days: 5.49%
-Missed 20 best days: 3.02%
-Missed 30 best days: 0.91%
-Missed 40 best days: -1.02%
-Missed 60 best days: -4.39%

Think about that. Out of 3,650 days, if you missed 1.64% of those days, you would have seen a -4.39% loss all because you had tried to predict the impossible.

Like Warren Buffet, the best value investor around said, “People that think they can predict the short-term movement of the stock market or listen to other people who talk about timing the market are making a big mistake.”

Do yourself a favor and stay in for the long haul. Nobody knows what is going to happen tomorrow, but over the long-term, your chances of a solid 6-7% return over the long-term are in your favor.

 

4. What education, experience and credentials qualify you to hold this position?

You obviously want your financial advisor to be well seasoned, as experienced as possible and have all the relevant types of credentials necessary. Having several credentials may look great on a resume or on your wall, but at the end of the day you need to pay attention and really think to yourself if the qualifications the advisor obtained are even relevant to your best interests in the first place.

In my opinion, these are the top three credentials you need to look for in a financial advisor. If they don't have either one of these, look somewhere else, because these credentials are the ones you look for in someone who has gone through rigorous studying to understand their duties as a true advisor:

1. Personal Financial Specialist (PFS)

A PFS helps individuals in estate planning, retirement planning, insurance and other areas of finance individuals run into. Candidates must have at least three years of financial planning experience and meet all the requirements of being a CPA, receive references and pass an exam.

2. Certificate Financial Planner (CFP)

A CFP assists individual people with their planning of their financial future. Their job is to help clients reach their financial goals that are long-term. Things like that include saving for retirement, saving for college, buying a house, etc.

In order to become a CFP you have to complete a course of study and then take a two-day exam and of course, pass it. The CFP covers topics including wealth management, tax planning, insurance, estate planning, retirement planning, etc. These are obviously all applicable to financial experiences a typical person will run into.

The major difference between a CFP and a PFS is the CPA credentials needed for a PFS. My problem I have with a PFS is there isn't a clear focus on investing and growing your wealth. With the CPA qualifications needed, this in my eyes, weakens the argument a PFS is a good option for strictly someone who is going to grow your money.

3. Chartered Financial Analyst (CFA)

The idea of the CFA originated back in the 1940s from the Dean of Wall Street himself and Warren Buffett's mentor, Benjamin Graham, the author of what Warren Buffet calls, “by far the best book on investing ever written,” The Intelligent Investor. In Graham's eyes, the CFA would accomplish three things:

-An indication to clients what the minimum requirements should be regarding competence and overall knowledge of the subject

-An additional notability for the analyst themselves

-Potential for increased salaries and rewards for their hard work studying for the intense exam

The CFA runs investment portfolios in larger environments, such as large investment companies on the buy and sell side, hedge funds or mutual funds. A CFA must have completed a tremendous amount of studying and passed three courses over the length of at least two years, usually longer.

This one person's experience studying sounds like an absolute nightmare, so if your advisor is a CFA, to say they put the work in is an understatement. And woa! If you're thinking about studying for the CFA, don't let yourself become that guy!

For me personally and from what I've read and been recommended, the CFA is the ultimate credential you would want to see in a financial advisor. They studied strictly for investing purposes with a focus on the valuation of all types of assets which is exactly what you want (value investing). You want an advisor to value assets, not invest in them because it's a stock that's about to blow up and they know that because of a “hot tip.”

The exams to be cautious for:

Any Series exam, most commonly the Series 6, 7, 63, 65 and 66.

This is what these exams allow you to do:

Series 6: Allows you to sell financial products like mutual funds, annuities and trusts

Series 7: Allows you to sell pretty much any type of security

Series 63: Authorizes you to run business throughout the country (mandatory)

Series 65: Required by anyone who intends on giving financial advice on a non-commission basis

Series 66: Combines the Series 65 and 63 exams into one

So as you can see, these Series exams have literally nothing to do with investing and everything to do with selling you something. It's a bunch of garbage. Don't ever buy into someone telling you they have your best interest if all they have are Series credentials. Ideally you would want someone managing your money with a CFA, but if not, a CFP or PFS is by and large much better than the other options.

Careers requiring a CFA do not require a Series license, so you do not need both, even though the Series 65 may seem like that's the case. This is typically because careers requiring a CFA are different from those requiring a Series license.

 

5. What is your performance record over the last 3, 5, 10, 15 years?

All of these questions would be for nothing if you didn't know what your advisor's performance was in the past. Of course, previous performance is not indicative of future performance, but that really only relates to the market itself in the short-term.

It does however reveal your advisor's mindset when things get tricky. Does your advisor trade in and out of mutual funds and risky stocks wracking up fees for you? Or does he or she stay the course and add money through dollar cost averaging instead? Both ways will make a crucial difference on your portfolio; one bad, one good.

I once sat in on a presentation my mom had for her nonprofit organization she manages. She gave a financial advisor from a prestigious firm a chance to explain why they were the best option to manage the organization's money. The whole time the guy went on and on and on about what techniques they were using to give them the best rates of performance ranging from within the next few months to several years down the line.

It was complete crap. Everywhere you read disclaimers saying past performance is not indicative of future results or something along those lines. This guy was adamant he was going to provide X returns in X amount of years.

I had enough of his BS, so I politely asked what his performances were in over the past 3, 5, 10 and 15 years. And surprise, surprise, due to the amount of data it would require to keep on file for the presentation, he was not able to provide the last 10 or 15 years, just the 3 and 5 years of performance. Which by the way, if you are with a reputable firm, is probably untrue. You can easily filter data to give you an average performance over years well beyond 15 years.

On top of that, the performance over the last 3 and 5 years was 2% and 5% less than the performance of the S&P 500 respectively. So I asked him what was up with that? Why not stick with an S&P 500 index fund then?

On and on he went on how there were a couple of anomalies (I hate that word, it means nothing) that went against their proven algorithm. Which is EXACTLY the point I'm trying to make. If you try to act impatiently and think you know something everyone else does, you will probably lose.

I also asked him why the market went down so much on a random point on his chart and he couldn't give me an answer. I'm like okay cool man, thanks for nothing.

Always make sure you ask your advisors what their performances have been in the past. Although past performance doesn't prove future results, if they are consistently performing worse than a simple S&P 500 index fund, run for the hills. They clearly do not have your best interest in mind. You need to make sure you check their past performances to take preventative measures from having these advisors slowly bleed away money because of silly mistakes or worse, deliberate fees.

 

6. How high of an average annual return do you think is reasonable?

If your advisor tells you he or she is capable of providing returns over 10% on average, your advisor is either lying to themselves, to you, or worse, both. The chances of your advisor beating the market are slim to none.

If you don't believe me, take a look at what Fortune and the Financial Times have to say about it. Pretty abysmal huh?

According to Fortune, the S&P 500 outperformed over 92% of large cap funds over the last 15 years. Mid and small cap funds lost 95.4% and 93.2% of the time vs the index in the same time span. Even worse, the Financial Times report 99% of actively managed US equity funds underperformed from 2006 until the day that article was published. This is why you need to look at 15 years of your advisor's performance.

Take a look at this CAGR (compound annual growth rate) calculator. The average return from January 1, 1924 until December 31, 2016 is 9.26%.

The thing is though, every time you hear how great the average has done in comparison to everyone else, this is solely because the dividends are being considered as reinvested. Don't believe it? The average performance for the same time period without dividends reinvested is 5.03%. Almost half the previous total. Isn't that insane? I remember looking at my brokerage account for the first time after I learned I needed to reinvest my dividends and the default in my account was not to reinvest…

This is why nobody will manage your money and take better care of it than you. The mutual funds not only are probably charging you insane fees, they may not even be reinvesting the dividends. There is literally no reason to put your money in any mutual funds other than an index fund (a type of mutual fund). Preferably, stick with an S&P 500 index fund, so you can reap the benefits of the average market performance without the heart attack. Because when you really look at it, an average market performance is better than average.

So on that note, make sure your advisor has reasonable expectations on the performance they can bring you, especially considering the fact your money may not even be invested in index funds. Take charge of where your money is being invested and switch the funds to an S&P 500 index fund, so you can sleep soundly. Make sure your dividends are being reinvested, and you will be all set.

 

7. How are you compensated?

Seems simple enough right? WRONG. Man, I was so pissed when I

1. saw how reluctant my advisor was to tell me how he was compensated and

2. got the answer I really didn't want to hear

I literally asked the simplest question. “Hey, how are you compensated by the way?” And I get the longest answer filled with a bunch of BS like “Oh well you see it depends on how your portfolio does and how the market's performing, blah blah blah.” So I'm thinking okay that makes sense I guess.

Then I say to him, “so if you're not on a salaried position, you're getting commission on my money? Does that mean you get commissioned based on how often you trade my money and which particular mutual funds it's in, giving you incentive to put my money somewhere you wouldn't otherwise?”

And he's like, “well no, we believe these funds are going to be the best performers for the year based on these metrics, blah blah blah.” I'm thinking to myself, this guy hasn't even given me a straight answer yet. Eventually I find out that yea, he is incentivized to place my money in particular funds and gets commissions for trading my money in and out of those funds.

I remember a few months ago my advisor literally said to me he doesn't think Apple is going to go much higher because of how much it's gone up recently, so I should sell a third of my position.

First of all, I don't intend on selling any portion of that investment for at least another ten years and second, the stock rose 20% since he said that so really, it just proves advisors are as clueless as the next person.

I kid you not, once I got rid of this $300 fee I mentioned before and started handling my money myself, my five-year average performance rose 3 percentage points and my three-year average performance rose 3.5 percentage points. And it's not because I'm a genius. It's because I got rid of underperforming mutual funds charging me 1.74%, 1.25% and some other crazy rates.

I sold all five of them and dumped that money into an S&P 500 index fund. The rest I saved my own money and placed a decent amount into Apple when the stock was at a two and a half-year low. I leveraged the S&P 500 index fund with one of the most reputable companies in the world when the stock was cheap. So far this has worked for me!

I don't mind telling you where my money is invested, because I want to see you succeed. Don't let your advisor put your money in low performing funds and trade your money between them frequently. The conflict of interest is too strong to ignore. This is your life, this is your financial freedom you're trying to achieve. Nobody is going to take better care of your money than you if you put in the effort to learn how to invest in index funds and great companies. The greatest advantage you have is time. There is no rush to growing your nest egg for retirement.

 

8. Have you ever had a formal complaint filed against you?

For me, when I first started out, I always thought an advisor at a big firm wouldn't have a complaint filed against them, or else they wouldn't still be holding the job they had as the financial advisor, right? I didn't realize these complaints are fairly common.

When complaints are filed they are usually for ignoring their client's instructions or worse, their risk tolerance. To flat-out ignore and disrespect your client's wishes concerning their own money when it comes to risk is unacceptable. Unless, in my opinion the advisor is putting their money in safer options like index funds, but even then, the advisor must consult with the client before doing anything.

What financial advisors can do is:

-recommend certain investments
-buy and sell those investments for you

What they cannot do is:

-trade without authorization unless they have discretion
-make any misrepresentations or omissions about investments they are recommending

When you have a new advisor, always try to test them to see if they will follow your wishes as far as your investments are concerned. If you think something is up, first see if the reason was because of a breakdown in communication rather than jumping to conclusions. Be sure to have all necessary documents in front of you, so you have all the facts, in case you don't get the answer you are looking for from your advisor.

If this doesn't work, then talk to a branch manager or speak with the compliance department if there is one. If speaking with your advisor doesn't get you the answers you are looking for, this is the next step. If this doesn't work, reach out to the compliance department to resolve the issue.

After you've done this and nothing has worked so far, you can file a complaint with FINRA (Financial Industry Regulatory Authority). Before you do though, they will ask you if you've contacted the firm, been defrauded by the firm and if you are trying to get the return of your money.

Then, you file arbitration. Basically, this is a formal alternative to a litigation where two or more parties choose a neutral third-party to settle a disagreement. Unfortunately, the average length of an arbitration lasts a little less than a year.

So, to avoid all of this headache, just be sure to ask your advisor right off the bat if they have ever had a complaint filed against them. This will save you a lot of time and frustration down the road.

To really avoid any problems, tell them you want your money in low-cost index funds and to always consult with you before they ever consider an alternative investment.

 

9. How many clients do you have and how often do you communicate with them?

It really comes down to being a numbers game. A person only has so many minutes in the day, month, year they can dedicate to one single client. The more clients an advisor has, the less time they will be able to dedicate towards your individual portfolio.

According to US News, the average financial advisor worked with 156 households in 2013, while the average advisor in 2011 worked with 165 households. I mean, that's not even enough time to dedicate two whole working days to each household. Even though the number is reduced since 2011, that's still a large number of clients.

Of course, you could also look at it and say that's because the advisor really knows his stuff and is able to work efficiently with a large number of clients. But we're human, and our brains can only retain and recall so much information. Unless your advisor is someone with a freak photographic memory, it's going to be nearly impossible for the advisor to recall every detail of every client's account.

This is another great reason for you to invest in yourself before you even consider investing your money. Put the time in to learn the basics of investing and go from there. Read some books, listen to some podcasts, do whatever it takes to carve out five minutes here and there to learn something new. That's what I did. I was extremely patient with myself, realizing this was something completely foreign to me, and I understood it would take some time to get a solid foundation.

The best place to start is my recommendations page with several suggestions of books and podcasts related to not just investing, but also encouraging you to think differently and learn how to create better habits for yourself. I found all of these were of tremendous value to me, and the best part is a book is super cheap and the podcasts are free. Virtually no risk here. Just find the time whether early in the morning, on your commute to work, during your lunch break, some time after work, whenever. Make the time and you'll see how much of a difference it truly makes.

So, bottom line is, you don't want some advisor forgetting where your money is, what your preferences and risk tolerances are, and then all of a sudden a third of your portfolio is in a large growth ETF when you're trying to be chill and match the S&P 500 index. Always ask how many clients your advisor is serving, or else you may find you're one of hundreds years later.

 

10. Who manages your money and do you invest in the same assets as you recommend your clients?

Now granted, your advisor could be lying to you when they give an answer, but let's go on the premise he or she isn't. This is probably my favorite question out of them all, because at the end of the day, if your advisor isn't even following the same principles based on how your money is being managed, something is obviously wrong here.

What you want to hear your advisor say is, “I manage my own money based on the same recommendations I provide to my clients.”

What you don't want to hear is your advisor go on a tangent on how they're investing their money differently because their conditions aren't the same as yours, and based on their allocation and risk tolerance they need to have X amount of dollars in Y, and during this market condition at their age it doesn't make sense that it's the same strategy as yours, etc.

Nope. Don't buy it. At the end of the day, I believe all you need is 90% in domestic index funds like the S&P 500 or Russell 2000 and 10% in an international low-cost index fund to give a buffer just in case the domestic market is down.

This is the red herring to watch out for. After asking a simple question, you don't want to hear your advisor go off on an argument basically with himself, trying to justify why his money isn't being applied with the same rules he or she uses for his clients.

This question to me, is the easiest way to tell if your advisor is full of crap. If they can't manage their money based on the same rules as your portfolio, shop around for another advisor. This one clearly doesn't have your best interests in mind.

Always remember nobody is going to take better care of your money than yourself. You manage money for one person only. You. They advise 100+ if not hundreds of clients. Take the reigns and make sure you aren't being ripped off with ridiculous fees.

Are there any other questions you feel you should ask your advisor? Feel free to share in the comments!