Welcome to the third (and final) part in our series on Financial Advisors.

Today, I want to provide you with five questions that you can ask your financial advisor. If you don’t have a financial advisor, you can use this questions when interviewing for a new Advisor (ask for the answers based on an average balanced portfolio under his or her management. It’s not the specific answers that are important, but whether the Advisor is able or willing to answer the questions).

1. What are the total costs and fees associated with my account?

If you can believe it, and unless your Advisor believed in transparency, up until recently this was one of the most difficult questions to get an answer for. I say up until recently because for decades the industry has lobbied (successfully) for a compensation structure that keeps the majority of investment fees hidden from investors.

And yes, that’s you.

It was not uncommon to ask this question to an Advisor and receive vague answers like, “Don’t worry about that, it’s the returns that matter,” or, “No need to concern yourself with that, it’s the mutual fund companies that pay my salary.” Worse, some Advisors—in an attempt to ensure the question is never asked again—will shame you into having asked the question, implying (or outright stating) that you have disrespected them but asking a question that insinuates they are untrustworthy.

No, I am not making this up.

However…somebody somewhere seems to have championed investors’ rights because as of December 2016, all investment statements must state the full costs to the portfolio (including the hidden ones) on each monthly statement. As you can imagine, the industry fought this tooth and nail.

(yes, there is actual a statement from Association CEO and President, Greg Pollack, to have all 12,000 Advisors in the club have their clients call their provincial legislators and demand that their mutual fund fees stay hidden, and that they are terrified they will suffer if they know how much they are paying in mutual fund fees.)

The last part I agree with.

On that note. I have a friend who told me for years that she had over $1,000,000 invested with a Financial Advisor who she trusted implicitly, who had provided decent advice and good service, and who was a family friend. Also, that this Advisor had reassured her several times that her annual fees were 1.0% Which is great.

But on her January 1, 2017, statement she saw that, in fact, she was paying almost 3.0% because yes, she was paying the 1.0% investment management fee and 2.0% average MER on over well over $900,000 of mutual funds.

Did the Advisor lie? No. My friend’s annual management investment fees were 1.0%. The Advisor simply omitted to tell my friend that the mutual funds recommended to her had MERs of 2.0%.

I’m sure she just forgot.

I cannot even imagine the opportunity costs to my friend’s portfolio on 1% vs. 3% on a $1,000,000 portfolio over 10 years. (hint: at 7% average annual return, it’s $328,564)

What a lovely family friend!

Bottom line: While the new legislation will provide with the total charges and fees associated with your account, I think this is still a good conversation to have with your Advisor—even just to see if s/he is open to the discussion.

2. What is my asset allocation?

We will cover asset allocation in an upcoming lesson, but essentially, it is your split between stocks and bonds (or conservative vs. risk). Any decision as to asset allocation should have (and I mean should, not could) a conversation around time horizon and risk tolerance, and so if she tells you either a) she is not sure or b) what your asset allocation is without you having providing her this information, you should probably think about finding a new Advisor.

Bottom line: Asset Allocation is one of the single most important decisions an investor will ever make. If an Advisor is glossing over it, you are in the wrong place.

Note: You will find an entire module on asset allocation in http://zerotoportfolio.com.

3. What is my 1 year, 3 years and 5 years rate of return?

You would think this would be something that would be provided to you on a regular basis, but no, there are still many brokerage firm statements that do not include this information. Your Advisor will have firm-provided software that calculates this on a daily basis and so there is no reason that you should ask and not receive this information.

Bottom line: You should not only have access to the rates of return on your portfolio(s) for any given time period but also whether your portfolio is ahead or behind of the benchmark index. (i.e. is your portfolio doing better or worse than if it was invested in a passive index fund or ETF.)

4. What is the current dividend yield on my portfolio?

We will have an upcoming lesson on dividends but consider this: From May 1980 to May 2017, the S&P 500 returned 6.833%, not including dividends and 10.046% including dividends*.

Bottom line: Dividends are important, and they matter. Unless you have made a conscious and explicit choice to exclude dividends from your portfolio, it is irresponsible (in my opinion) to not optimize a portfolio to include returns from dividends.

5. Are you a fiduciary or are you held to a fiduciary standard?

The fiduciary standard of care basically says that an Advisor must put your interests before his or her own. I know. You just fell off your chair right. You were probably thinking that all Financial Advisors would have to put what is best for their client (i.e. you) before their own interests (say, putting you in a higher risk investment that is not appropriate for you, but the hidden commission was just so high he couldn’t resist!). But no, there are still huge swaths of Financial Advisors in Canada that are not held to a fiduciary standard.

And yes, of course, the financial industry is fighting this one as well.

There are other questions you could be asking your Advisor as well, related to tax planning, estate planning, insurance, etc. but the above questions would be my top five questions related to investment management.

That concludes this 3-part series on Financial Advisors, I hope you found it useful! I will be back in your inbox tomorrow with core lesson six: Bonds.

Series Links:

Part One
Part Two
Part Three

*all dividends reinvested; source https://dqydj.com/sp-500-return-calculator/

PS, if this is feeling overwhelming to you or you have decided that working with a Financial Advisor is not for you, don’t hesitate to take a look at my online course, Zero to Portfolio, An Investing MasterClass.

The course is 100% online self-study and is structured as over 10 hours (and 10 modules, 30+ lessons) of HD video, providing you with everything you need (and nothing you don’t) to create and manage a successful investment portfolio. Click here to learn more!

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