After 17 years as a CERTIFIED FINANCIAL PLANNER™ and an additional 6 years in the financial services industry before that, I have heard a lot of questions from people seeking to hire a financial planner or advisor. Asking the questions below may help you gather information, but generally speaking, these are the worst questions to ask.
Financial advisors don’t want to hear these 5 questions
Get started on the right foot with your financial advisor by avoiding these 5 questions.
1. “If I invest my money with you, will your investment strategy beat the market?”
Everyone wants to see big returns on their investments for the lowest price. Financial advisors understand this because they are human too. They understand finances are just like every other product or service you buy and sell.
For example, when you buy a vehicle – a car, RV, or motorcycle – you think about resale value. What will this product be worth down the road? The same thought process holds true for your portfolio. What will it be worth down the road? Will you get the investment made in a financial advisor back when it’s time to sell or retire? It’s important to spend your money wisely, but you also need to have realistic expectations. You can’t expect your RV to be worth more than the market. It could happen, but it also may not. Think of investing the same way.
That’s the problem with the question, “will your investment strategy beat the market?” First, it starts the client and financial advisor relationship off on the wrong path. Unrealistic expectations make success hard to achieve. Second, your portfolio likely can’t be compared to the market performance because your asset mix is different.
When someone asks about beating the market, they are hoping to outperform the S&P 500 or other indexes. If you have a diverse portfolio, you likely invest in holdings, not in the S&P 500 like international stocks. This is just one example, as there are other indexes and other funds that may or may not be in that index or your portfolio. The bottom line – comparing your portfolio to one index is not a fair measurement of success. Therefore, you put unrealistic expectations on the advisor.
The question you really should be asking is “How will you measure the success we have working together? Or “What happens if our relationship does not work out?”
2. “I only want investments that have no risk and high returns. How will you accomplish this for me?”
Profits drive most questions to a financial advisor. That’s because we all dream of a rich retirement. You just have to find the roadmap to get you there.
Risk is a personal choice. You have to feel comfortable with the financial decisions you make. Figuring out your risk level requires reflection on your overall strategy to reach your goal. How much risk can you take, and how much are you comfortable taking? Will you get nervous if you see a big dip in your investments?
Investing requires an emotional gut check. What’s your comfort level? Be honest with yourself and your advisor so there’s not disappointment down the road.
The right risk level for you may be different for your neighbor. Generally, you want to take less risk the closer you are to retirement. Your age is a contributing factor, but so are your portfolio value and retirement goals.
Risk can lead to failure or reward. Think of it like climbing a mountain. If you’re in an RV, it’s risky to drive the windy, narrow switchback roads to the top. The RV is top-heavy and difficult to drive. It takes a slow, steady pace to make it to the top. Once there, the view is breathtaking. It’s a view you can’t get anywhere else. It makes those white-knuckle moments on the road to the top worth it. That’s what investing is like. There are white-knuckle moments, but with the right advisor and long-term strategy, you will build a mountain of retirement earnings that will allow you to retire happily.
The question you should be asking is, “How will you determine my risk tolerance?”
3. “Will you buy only things that go up? I don’t want to lose any money.”
If you are asking this question you may not be suited to take on the risk of investing. The nature of investing is that you will take on short-term volatility in hopes of achieving long-term gains.
A diversified portfolio is designed to reduce risk by not putting all your eggs in one basket. Asset allocation, which simply means spreading your assets among stocks, bonds, cash, and perhaps some alternatives, is key in a diversified portfolio.
If you expect everything to go up in the portfolio you will be disappointed in the end. Not because everything is not up, but because you will want to sell investments that are down and buy more of what is up. This strategy of chasing returns is an almost certain recipe for disaster. The proper move would be to rebalance which is the exact opposite of chasing returns.
Remember, you are not only interviewing the advisor, the advisor is learning about you too. If a good advisor believes that you expect everything to go up and if it doesn’t, you will want to chase returns, he will likely not want to work with you.
A better question to ask is, “Will you have discretion over my investment account?”
4. “When will you suggest I sell out and go to cash? Can you buy me into the market at the very bottom?”
Everyone wants to buy low and sell high thus making the most money. However, that’s not always possible. Sometimes timing is off. That happens all the time in life and the financial markets are no different.
This is a bad question to ask a financial advisor because you are suggesting that you want the advisor to time the market. Jumping from investments to cash and back again is risky business. Sure, it may work out once or twice, but the more likely scenario is that you miss out on hefty market gains. No to mention the potential tax and trading costs.
No one has a crystal ball, not even the best advisor. Again, if an advisor feels that your expectation is to time the market, you have likely scared off good advisors from working with you. An advisor’s job is really to limit your risk and develop a solid plan for the future. Extreme market timing has no place with a good advisor.
A better question to ask is “Are you a fiduciary all the time?” In other words, are you always looking out for me and being transparent about conflicts.
5. “My financial plan is based on “rules of thumb” that I have read about or seen on TV. Is this how you do financial planning?”
TV shows and articles make investing seem easy. They focus on “rules of thumb” or broad investment principles. The strategies are general and don’t take into consideration personal decisions, feelings, and goals.
Decisions in the financial world are deeply personal. They vary from person to person depending on your emotional attachment to the money, overall financial health, retirement goals, age, portfolio mix, and investment value. That’s why these “rules of thumb” or broad investment principles are not always the best choice for you.
In a reality TV and DIY world, it’s easy to get caught up in these general economic theories. Don’t let that happen. It’s alright to bounce ideas off your planner, but don’t be surprised if he tells you the outcome isn’t as glamorous as it sounded on TV.
You should really be asking your financial planner if they put your needs first or if they have a one-size fits all investment strategy for clients. A better question is “How do you incorporate your investment strategy with financial planning?”That gets to the heart of the planner or wealth manager’s approach to each client’s investments. You should also ask these 10 questions.
See you on the Open Road!
Todd Minear, CFP©