Image above: Flickr.com
Managing your investment portfolio is a lot like tending to a garden. Not only do you need the right plants for the soil conditions and then you need to make sure they get enough light and water. However, your work is not done. You will also need to check for weeds and pests. Granted, you won’t find weevils in your investment account, but you shouldn’t ignore your portfolio either and here are five questions you need to ask your financial advisor.
1) What are the Costs?
Management fees can add up quickly and you want to make sure you understand how your advisor charges for their services. Make sure that they can clearly explain to you what their all-in costs will be.
This includes transaction fees, annual fees, and any other charges they have for the privilege of managing your money. Be mindful of how these costs can add up over time, especially if you are an active trader and ask your advisor what options they have.
2) What it the Real Performance?
Advisors like to benchmark their performance to indexes such as the S&P 500. While this is a good strategy, the way they present their performance is often misleading. Make sure you ask them whether the benchmarks are net of fees or not.
Remember, investing through an advisor is not an excuse to walk away from your money. Instead, you want to use their experience to put together a strategy which works for you. However, it is up to you to make sure the results match your expectations.
Another important reason to ask this question is for you to get a better understanding of who your advisor is actually putting you first. Are you just a paycheck to them, or are they trying to place your money in vehicles which will properly balance risk, returns, and fees? By answering this question, you will be able to benchmark your adviser.
3) Am I Moving Closer to My Goals?
This is an easy question to answer when the market is going gangbusters. But it can be trickier when volatility is the order of the day. However, this is the most important question you can ask an advisor.
In most cases, you are trying to save money for your children’s college education and retirement. As such, you need a strategy which gives you the returns needed to grow your balance with the safety required to make sure the money is still there when you need it.
Remember, you want an advisor to set up a plan which will ensure you don’t run out of money and one of the best ways to do this is to make sure that the conversation revolves around your goals and any changes in your life.
4) How Much am I Worth?
Ok, we are all special, but this question focuses on your net worth. In 2013, the Federal Reserve found that the average net worth of households from ages 55 to 64 was just under $800,000. While this might sound like a lot of money, the fact is that much of this money will be tied up in the home.
As such, looking at net worth while help you to know how much liquid capital you have on hand as well as the value of other assets – houses, cars, collections, etc. Another reason to look at net worth is that this will force you to look at your liabilities as well.
While it is always a good idea to look at both your assets and liabilities, the impact of being underwater can be even worse as you near retirement. Yet another reason to look at net worth is make sure that you are not chipping away at the underlying cash in your portfolio.
Think about it, we are living longer than ever before and if you retire at 70, it is quite likely that you could live into your 90’s. As such, you want to make sure you are not eating away at the principal in your portfolio or you will under up with nothing over the long run.
5) What Are My Options?
Times change and you want to make sure you retain the flexibility to change with them. This includes looking at your options. Take reverse mortgages for instance. If you are considering getting one, then you want to be able to sit with your advisor to review how it works with actual examples. This way you can make sure this step is the right fit for you.
Remember these five questions when you sit with your financial advisor and you will have a better idea of how they work and if your portfolio is working for you.
