15 Questions Your Adviser Must Answer NOW!

By Leland B. Hevner, President of the National Association of Online Investors

I don’t have to tell you that 2008 was a disaster for individual investors. It was the worst year for stocks since 1931. And 2009 isn’t starting any better, with January experiencing the worst market drop for this month ever.

But it wasn’t the markets that dictated your returns in 2008. It was how you invested in reaction to them. According to Securities and Exchange Commission (SEC) statistics, over 50% of you sought the help of financial advisers in 2008. The return on your portfolio depended more on them than on the markets. So you need to know not only how the markets performed but also how your adviser performed in 2008. The purpose of this column is to enable you get this information in the most efficient manner by asking the right questions.

Let’s start by defining some action items. As soon as possible, set up a face-to-face meeting with your adviser and schedule 1 hour of his/her time – a phone call won’t do. Print out the list of questions below and take them to the meeting. Also take a small digital recorder (a $39 investment at most) that you will place on the table in record mode during the discussion. Tell your adviser that are using it because you need to concentrate on the discussion, not writing down everything you hear. This simple act will signal to your adviser to not attempt to either evade the questions you will be asking or to shade the truth in any area.

As a long-term teacher of personal investing, I know that people are often intimidated when speaking with their adviser. This needs to change, and your approach to this meeting is critical. Always keep in mind that the adviser works for you, and this is your meeting. You need to control it. Make it clear that you must get through 15 questions before the meeting is over, so tell your adviser to keep this in mind. Otherwise, you may be subjected to a simple sales presentation and an attempt to “run out the clock” without answering the hard questions.

You are now ready to ask the following questions in three categories.

Looking Back at 2008

Here, the goal is to get details on how your portfolio performed last year. It probably did badly. But if you lost only 20% while the markets were losing 40%, then maybe your adviser did a pretty good job. It’s all relative.

1. What was the overall return for my portfolio in 2008? How does this compare to market averages?
2. What is my current allocation to the three asset classes (cash, bonds, stocks) and did you change it during the year in response to market conditions? If so, when, how, and why?
3. How did each of my asset classes perform in 2008 in relation to market averages? (In 2008, the total bond market returned about +7.9%, the stock market as represented by the S&P 500 lost about 37%, and cash returns were between 2% and 3% for the year.)
4. What was my best-performing investment in 2008, and what was its return? Why was this the best performer?
5. What was my worst-performing investment during 2008, and what was its return? Why was this the worst performer, and do I still own it?
6. How would you evaluate the quality of your advice to me in 2008? What were your good decisions, and what were your bad decisions?

2008 Costs

Whether you lost or gained money in 2008, you paid your adviser money for the privilege of working with him/her. Some of these costs you may already know about, but some may come as a surprise. In either case, let’s get them on the table (and on your digital recorder).

1. In 2008, how much in total did I pay you to be my adviser?
2. Please review for me our fee structure. Am I paying you a percentage based on the value of the money I have invested with you or are we using another formula? Break down the total costs for the year.
3. How much compensation did you earn in 2008 from fees and commissions related to the investments you bought on my behalf? (Often, fund companies give advisers commissions for selling their funds. You need to evaluate whether this is influencing your adviser’s decisions.)
4. Which investments, if any, did you receive commissions on and how did they perform in 2008 relative to other funds in the same category?

Don’t let your adviser skirt the cost issue by saying he/she doesn’t have the exact numbers at hand. This information has to be disclosed to you by law. If he/she doesn’t have the information right then, set a specific date for getting it and make sure you follow up. Remember, you have a recorder running and your adviser knows it, too.

Looking Forward to 2009

It is now time to look forward to 2009. At this point you are interviewing the adviser to determine if he/she will continue to be your adviser.

1. What is your outlook for 2009? Include in your answer the effects that you see related to the new administration’s policies, including the stimulus package.
2. Based on this outlook, what changes and strategies are you proposing for my asset allocation right now to both protect and grow my portfolio in 2009?
3. What changes, if any, are you proposing for the investments I currently own in each asset class, and why?
4. How often do you review my portfolio mix and performance, and can we, today, schedule periodic portfolio reviews for the coming year? (I would suggest at least one sit-down meeting per quarter.)
5. Why are you the best person for me to use as a financial adviser in 2009?

These are your questions. Don’t leave without having all of them answered or a specific date when you will get the answers. I suggest that soon after the meeting you send the adviser an e-mail with the dates agreed to and the information required. Also put them on your calendar and then follow up.

Summary

Now you have the facts, and the impressions, to determine whether you want to continue with this adviser. You have just completed his/her job interview.

Red flags include the following:

• Your portfolio underperformed the market in 2008.
• No action was taken as conditions changed dramatically during the past year.
• Your adviser is selling you investments on which he/she receives commissions.
• You were surprised at any of the costs you are incurring.
• Too many of your questions were not answered during the meeting.
• You come away not sure of your adviser’s plan for dealing with the markets of 2009.
• When you follow up, your adviser does not have the information ready for you on the date he/she promised.

A complete college-level study course in investing basics and creating your investing plan is available for free from the National Association of Online Investors.