3 Key Investing Questions for Your Advisor

Investing
3 Key Investing Questions for Your Advisor

By Brett Tushingham

Learn more about Brett on NerdWallet’s Ask an Advisor

My two young boys, Reece and Ryder, ask me all the time, “Daddy, how do you make people money?” I tell them that I create a plan and then stick with it. Though the boys don’t know it, this question is especially relevant now, given the recent ups and downs in the market.

It’s not always easy to stick with your plan, especially amid market volatility. But knowing a few key points about the way your money is invested may give you the confidence to stay the course. Here are three key questions you can ask your current financial advisor, or one you’re thinking of hiring.

1. What’s your investment philosophy?

From the start, you should be aware of your advisor’s philosophy — the strategy he or she uses to invest your money. Perhaps your advisor follows a “buy and hold” strategy, a passive approach in which investments are held for the long term, regardless of short-term movements in the market. Others might favor a more active approach, with the goal of beating the market in all environments.

What’s important is that you are comfortable with the stated strategy and with your advisor’s ability to execute it. Whatever the strategy, it should dictate a clear process that guides the advisor in making investment decisions. Which leads to the next question.

2. What is your investment process?

Once you understand your advisor’s philosophy, ask how he or she intends to carry it out. Does your advisor select mutual funds and then rely on the fund managers to make investment decisions? Does your advisor employ a value-based approach, analyzing individual companies in-house with little regard to overall market fundamentals? Or perhaps your advisor favors a fundamental-first approach and uses a team of analysts when making decisions on behalf of clients.

Regardless of the specifics, confirm that there is indeed a process in place, and be confident that your advisor can deliver on it. An investment process will ensure that decisions are based not on emotion or “gut feeling,” but instead on a given set of principles.

3. How much will it cost?

According to a recent study from business consulting firm Ernst & Young, 35% of clients don’t know what they pay their financial advisor each year. This is troubling, considering that costs play a major role in future returns.

You should be fully aware of what your total investment costs are. This includes the asset management fee and the commissions (if any) paid to the advisor — but by no means does it end there. Other costs that eat away at returns are internal expenses such as fund expense ratios, internal transaction costs tied to the funds and account fees.

I recently met with a prospective client who had no idea that she was paying north of 3% a year when all the fees were added up. To demonstrate the impact of fees on your portfolio, consider this example: Assume you were to invest $100,000 over 30 years at a 7% rate of return. After 30 years, you would have $324,430 if you paid 3% a year in fees, $432,194 with 2% annual fees and $574,349 with 1% annual fees. Those two percentage points correspond to a difference of nearly 80%. Fees clearly matter — a lot.

While this is not an exhaustive list of topics to discuss with your advisor, hopefully the answers to these three quick questions can provide some peace of mind. Otherwise, seek a second opinion and find an advisor whose philosophy and process align with your own.


Image via iStock.


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