Jason Zweig recently wrote a piece titled “The 19 Questions to Ask Your Financial Advisor.” I love Jason’s stuff and who doesn’t like lists? So I thought I would take a run at answering some of these, and giving some commentary here along the way. So here we go!
1. Are you always a fiduciary, and will you state that in writing?
Yes, yes, yes. An all-the-time fiduciary even. No part-time status here. No “I’m a fiduciary when we do planning but then later I get to switch hats and sell you terrible products for huge commissions.” Every financial advisor in the country has this choice – be in business as a fiduciary or not. How you choose to practice says a great deal about your professional values.
2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)
No. Every penny I earn in this business comes only from retainer fees or hourly fees paid directly by clients. I do not share revenue with product providers or custodians like Charles Schwab. No one cares what I recommend, least of all my wallet. I haven’t been taken out to a steak dinner or an Avalanche game in years.
3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors? (No.)
No. Unfortunately for me there are no all-expenses-paid cruises waiting if I can just convince a few more people to lock up their money in some horrible annuity. Fortunately for me I sleep pretty well at night as a result.
4. Will you itemize all your fees and expenses in writing? (Yes.)
Sure thing, right here. It’s pretty straightforward. Clients pay $4,800 a year, charged quarterly in advance. That’s it. Nothing related to the size of your portfolio or your household income or your net worth. $4,800 per year.
5. Are your fees negotiable? (Yes.)
Nope. The fee is $4,800, and the services are the same for all clients. Comprehensive financial planning. Discretionary portfolio management. Here when you need me. No limits on questions/phone calls/emails/meetings (so far). If that arrangement works for you, it works for me. No need for negotiation.
6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? (Yes.)
Way ahead of you. Except that I don’t do hourly work any more. I think it is a fine business model if that is what people are looking for, but I’m here for the engaged, long-term relationship and a retainer is the best model for that. There are plenty of good advisors who do hourly work, and if you are looking for a one-time engagement the Garrett Planning Network or the XY Planning Network would be a great place to start.
7. Can you tell me about your conflicts of interest, orally and in writing? (Yes, and no adviser should deny having any conflicts.)
Of course. Every advisor, regardless of business model or form of compensation, will have some conflicts. I’ve tried hard to build a model with as few as possible. My motivations are fairly simple: I want you to remain a client for a long time, and pay me every year. I don’t care if you take money from your portfolio to buy something or invest elsewhere. I suppose if you wanted to buy a single premium annuity with the whole of your investment portfolio and collect a monthly check forever, you might not need my services anymore. Maybe you’d rather DIY your portfolio and pay an advisor hourly, in which case we aren’t a great fit. I also have a financial motivation to take on additional clients, and there is a potential conflict there. However, I’ve actively limited my client list for my own personal sanity and happiness.
8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)
No. Again, my single source of any revenue is the retainer fee paid by my clients.
9. Do you pay referral fees to generate new clients? (No.)
No. I have good relationships with great CPAs and attorneys who sometimes refer me clients. Sometimes I take them to breakfast. Sometimes they take me to breakfast. No referral fees are or will ever be exchanged.
10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? (Here the best answer depends on your needs as a client.)
I provide portfolio management and comprehensive financial planning services. That means that in addition to building a reasonable portfolio and managing it over time, we’re going to talk about cash flows, taxes, retirement savings vehicles, retirement spending strategies, Roth IRA conversions, life insurance, disability insurance, appropriate levels of liquidity, college savings strategies, estate and wealth transfer, charitable giving and the like. I don’t break down and analyze clients’ monthly bills from Comcast and Verizon or worry about how much your trash bill is.
11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)
No, see #9.
12. What is your investment philosophy?
I’ve written about this in some detail here, but I’ll try to sum up. You should probably do less with your portfolio, and do it more efficiently. The odds of you picking a handful of stocks that can beat the broad market are not good. The odds of you picking a manager that can pick a handful of stocks that can beat the market are probably worse. And the odds of you picking a financial advisor who can pick a manager that can pick a handful of stocks that can beat the market are worse still. So don’t try to do those things, okay? Diversify broadly into low cost and tax efficient investment vehicles. Be smart about where you locate those assets into taxable vs. retirement accounts. Develop an Investment Policy Statement that keeps you from making the wrong moves at the wrong time. Choose a plan/process/philosophy and stick to it. No switching horses when things “aren’t working.”
13. Do you believe in technical analysis or market timing? (No.)
No. There is a reasonable amount of evidence that momentum based strategies can, in some market enviroments, reduce portfolio risk. In others, these strategies can whip you around so fast you’ll get chewed up and spit out. They are also less tax-efficient than a broad buy-and-hold strategy. Personally I don’t have the mental constitution for getting in/out or heavy/light based on timing factors, so I don’t try. I don’t think most people should either.
14. Do you believe you can beat the market? (No.)
No. I think that historical factors exist (such as small caps and value stocks beating their larger, more expensive brethren), but that is market-based beta, not skill.
15. How often do you trade? (As seldom as possible, ideally once or twice a year at most.)
Probably less often than you think a portfolio manager/advisor should. If we have new cash to invest, that gets traded. If you need cash from the portfolio for living expenses or the like, that’s a trade. But rebalancing happens not more than once a year, and only after your portfolio is materially out of alignment (20% or more) from its targets. It takes a big move in markets to become that disjointed, and it’s normal for nothing to happen in your portfolio. That’s the goal, remember? To be a long-term investor. That means you don’t trade because of what North Korea did or what some guy said on CNBC, no matter how big of a bond fund he runs.
16. How do you report investment performance? (After all expenses, compared to an average of highly similar assets that includes dividends or interest income, over the short and long term.)
Clients receive quarterly formal performance reports, and have daily access to GIPS-compliant time weighted portfolio performance through an online portal. These numbers reflect all available costs (including my fee if it is deducted from the portfolio). I wish we could accurately report performance net of taxes but there are too many variables. Reports show the performance of relevant indexes as well.
17. Which professional credentials do you have, and what are their requirements? (Among the best are CFA [Chartered Financial Analyst], CPA [Certified Public Accountant] and CFP, which all require rigorous study, continuing education and adherence to high ethical standards. Many other financial certifications are marketing tools masquerading as fancy diplomas on an adviser’s wall.)
I am a Certified Financial Planner practitioner. It is the standard for financial planning, and it is important. I think it is the most straightforward bar to clear for financial planners who want to be taken seriously. I considered the CFA but felt that it had limited real-world application for someone working directly with financial planning clients and not actively managing stock or bond portfolios.
18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? (If I told you anything over 3% to 4% annually, I’d be either naive or deceptive.)
Of course, it depends. But most people should expect nominal (before-inflation) returns of 6-7% on a somewhat balanced portfolio. Assume taxes might eat 0.50% of that, depending on your portfolio, and inflation is going to eat 2-3% of that, and you land pretty close to Jason’s 3-4% figure. Conservative clients should expect lower returns, and very aggressive investors may receive higher returns over long periods of time. I have absolutely lost prospective clients when I tell them these figures, and someone out there is promising them 9%. Good luck to them!
19. Who manages your money? (I do, and I invest in the same assets I recommend to clients.)
I do. I also think that it is perfectly reasonable for an advisor to have their own advisor. I don’t, but I have good friends in this business that I know I can rely on if I need an outside opinion. My portfolio looks like a (smaller and) more aggressive version of what most of my clients own. We all generally own the same funds and ETFs, just in different allocations. I’m 34 years old, and very comfortable with portfolio risk. So I have a much larger allocation to stocks and smaller allocation to bonds than a 55 year old client does. My portfolio gets managed the same way as my clients, I am just as boring with my money as I am with theirs. When I have new funds to deposit, I check my asset allocation and put cash to work where I am underweight. It is horribly boring, and effective.
Bason Asset Management 