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I realize that, despite what I write about, the vast majority of you will decide to choose a financial professional to assist you with your investment portfolio and reaching your long-term financial goals.  Going to see a Financial Advisor can be an intimidating experience.  You are coming in with limited knowledge of the financial markets, and you hear from the financial media and read in financial publications that the market is poised to go up, dive with a correction, or consolidate (i.e. unchanged).  The “noise” causes confusion.  Not to mention that the jargon utilized in the investment world is difficult to get up to speed quickly.  Your Financial Advisor should be able to explain his/her approach in layman’s terms, explain available services, and discuss the fee schedule of the firm.  Luckily for you, I have prepared a list which you can prepare for that meeting in 45-60 minutes and be armed with better questions and a foundation in the workings of the financial markets and some of the terminology.  Just so you know, I would say that if you perform this exercise, you will most likely be in the 90th-95th percentile of retail investor knowledge.  Here is the list of questions with links to past posts on the blog:

List of Questions

1)       How do you approach tactical versus strategic strategies for reallocating ones investment portfolio?


Refer to this post for more information:  https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/.


2)      How do you go about constructing an investment portfolio for me?

For more information regarding the construction of an investment portfolio can be found here:  https://latticeworkwealth.com/2013/07/16/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-1-of-2/.

3)      How do you calculate the fees that I will pay in both percentage terms and absolute dollars?


Here is a link to a further explanation of this concept:  https://latticeworkwealth.com/2013/07/11/is-learning-about-investing-worth-it-how-about-224000-or-320000-worth/.  Fees lead to an opportunity cost because you could have invested those fees in the stock market yourself.


4)      Will you provide me with a blended benchmark to track my investment performance?  Will you highlight both absolute returns and relative returns in regard to my selected target annual rate of return on my investment portfolio?


For more information on blended benchmarks, please refer to this post:  https://latticeworkwealth.com/2013/07/19/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-2-of-2/.


5)      How do I calculate the value you provide from recommending a given asset allocation for my investment portfolio?


Please refer to the following post for additional information: https://latticeworkwealth.com/2013/08/07/are-your-financial-advisors-fees-reasonable-here-is-a-unique-way-to-look-at-what-clients-pay-for/.


6)      How do you arrive at expected returns for my investment portfolio?  Do you tend to use arithmetic averages or geometric averages?


  For more information on this concept, please refer to this post: https://latticeworkwealth.com/2013/07/08/double-edged-sword-of-the-power-of-compounding/.


7)      If I have a long-relationship with you to manage my money?  How will fees add up over time?  Am I making a “bet” that you will beat the financial markets?


This topic is always the hardest to discuss.  When you choose a financial professional, the ideal relationship is for the rest of your lifetime.  If you are retiring soon or just retired, you are likely to be dealing with the Financial Advisor you select for 20+ years.  It is a big decision because you will be paying AUM fees for the rest of the relationship.  You need to know what you are getting into and feel comfortable with that Financial Advisor because they are helping you live your golden years in the way you always envisioned.  How do you go about determining the value that the prospective Financial Advisor will provide over your retirement years?


You need to use the economic concept of opportunity cost.  If you have a retirement portfolio worth $1 million at the start of your retirement and your Financial Advisor charges you a 1% AUM fee, you will pay $200,000 ($10,000 * 20 years) over the course of the relationship.  Well, think about that.  If you managed your own investments, you would not need to pay that AUM fee.  You could take that $10,000 and invest that money in an ETF or index mutual fund tied to the S&P 500 and earn the long-term historical average of that index which is roughly 7%.  Now if you did that, you would have roughly $425,570 at the end of 20 years.  As you might imagine, dollars 20 years from now will not be worth as much as they are now.  So how do you relate your opportunity cost into present day dollars?  You do a process called discounting.  If you assume inflation will equal 3.25% over the course of those 20 years, you would have $224,475 in today’s dollars.


Now let’s reference your beginning portfolio balance.  You can think about this in two ways.  First, that is the cost of you not managing your own investments which is a decision that only you can make.  You need to measure the utility of your leisure and your risk tolerance (emotional about money and acting rashly at times).  Second, you are making a $224,475 “bet” that the prospective Financial Advisor can beat the market.  Remember you could just choose an asset allocation yourself.  You will earn the index averages minus the expense ratio of those investments.  Most expense ratios on passive options are 0.20% or less.  You will never beat the market averages, but you avoid the chance that your Financial Advisor recommends a poor choice for your asset allocation that significantly underperforms its proper benchmark.


Now if you do not have $1 million or the AUM fee is not 1%, you can easily calculate how much your present value is.  Simply take the ratio of your investment portfolio divided by $1 million and multiply by the AUM fee as a number.  Here is an example:  let’s say you have $250,000 now and your AUM fee is still 1%.  Your present value would be $56,370 (($250,000/$1,000,000) * 1.  If you compare that to your entire portfolio, the amount is approximately 22.5% ($56,370/$250,000) of your portfolio value.


There is no reason why you cannot work with a Financial Advisor for a couple of years and then take the reins once you learn from him/her and get comfortable with the volatility and workings of the financial markets.  You can seek out a financial planner or an independent Registered Investment Advisor (RIA) who charges an hourly fee.  You could go to see that financial professional and pay may $200-$250 per hour.  You might spend two hours at year-end and maybe see him/her once during the year when current events make you want to sell all your stocks, bonds, and other assets.  That financial professional can probably “talk you off the ledge” in one hour.  If we look at that in totality, you would pay that type of financial professional $600-$750 over the course of the year.  Looking back at our hypothetical portfolio of $1 million with a 1% AUM fee, you would be paying $10,000 to the Financial Advisor.  This option would save you over $9,000 in fees.  Try to remember that the choice is not manage your own investments or turn it over to a Financial Advisor.  There is a “gray” area where you use a trusted financial professional to bounce ideas off of.  Therefore, there is a spectrum of choices when you are looking at how to ensure that your investment portfolio will allow you to reach your financial goals successfully.


As you can see, you should be quite comfortable and more confident going to speak with a prospective Financial Advisor.  Keep a few things in mind though.  You spent about 60 minutes doing a crash course in learning the fundamentals of portfolio construction and fees.  The Financial Advisor has years of experience and deals with clients every single day.  So if the Financial Advisor does not understand the questions, does not know the answers, thinks the questions are not relevant, or tries to steer you away from looking at fees and relative returns, I would seriously consider looking for another Financial Advisor.  These types of questions are what a high net worth client would ask.  You may not have $5 million+ to invest, but there is no reason why you cannot ask similar questions.  It is your hard-earned money, and you deserve exceptional service no matter whatever the amount in your investment portfolio.

For your free eBook, please send me an email with your name and email address. I will send you the expanded version of this list of questions. My email address is latticeworkwealth@gmail.com. Please feel free to ask any questions or provide feedback as well. Thank you.