Three questions you need to ask your financial advisor

I’m a big fan of self-directed, or DIY, investing. I’ve been managing all of our retirement funds since we began investing 16 years ago. However, I realize that the self-directed route isn’t for everyone, and that lots of teachers prefer to use a financial advisor. If that’s you, it’s fantastic that you’re investing! Don’t stop there. A few simple questions can help you make sure your advisor is making the most of your money for you.

Many teachers don’t know the basics about what their financial advisor has added to their portfolio or how much their financial advisor is taking in fees. Or maybe they had a brief conversation with their advisor when they set up their account a decade ago and haven’t checked in since. This is a very common scenario since we’re pretty busy, and teaching and investing don’t exactly go hand-in-hand. Unfortunately this can set a lot of us up to be taken advantage of with high fees and underperforming investments. In this post, I’ll explain why you should know the basics about your portfolio and how to ensure your advisor is charting exactly the course you want for your future. 

Asking your advisor these three questions will help you understand the most important factors about your investments:

  1. Do you have a fiduciary duty? You want a resounding “YES” to this one. A fiduciary duty means the advisor is legally bound to act in your best interest. It means they can’t sell you funds just because those funds will earn them more money in commissions. So no matter what your professional is called (broker, advisor, planner, wealth manager, investment counselor, etc) or what certifications they have, step 1 is to make sure they are operating under a fiduciary duty. 
  2. What is the total percentage that I’m paying in fees for my portfolio? Your advisor is providing a service to you, so it’s reasonable to expect that some of your money will go towards paying them. The problem is that they’ll almost never lead with how much you’re paying them and what it costs you in the end. If they do mention it, they’ll likely minimize it by saying, “Oh, you’re only paying 3% in fees.” You might think 3% sounds pretty reasonable, but it’s actually really high. Especially when you consider that investment fees are one of the most reliable predictors of future earnings. You can also read this article to see the impact that fees have on your bottom line. Ask your advisor what the expense ratios are of the funds that you’re invested in, along with any fees you pay when the advisor buys or sells shares for you. You also want to know the fee that the advisor takes. Sometimes all of these fees are wrapped up neatly into one number. In the one account that I have to use a financial advisor for, my fees add up to .43% (which is way higher than I’d like them to be). Other times the fees will be much harder to find. If your advisor cannot give you a clear, concise answer on the total fees you’re paying, keep digging until you get an answer. Once you get the total percentage you’re paying in fees, use this fee calculator to see what they are costing you in the long run. 
  3. How does my total rate of return compare to market indexes? Every year the total stock market and the individual sectors of the market have what’s called a “total return.” It’s a measure of how much the value of those stocks or bonds grew over the year. For example, the Vanguard Total Stock Market Index Fund had a return of 20.99% in 2020. That’s extremely high, even when you subtract the inflation rate of .62% and the fund’s expense ratio of .04%. That means that if you owned shares of that fund, your money would’ve grown by 20% in one year. Wowza. Your advisor should be able to explain how the funds you’re in hold up against the comparable indexes (or sectors) of the market. If your returns aren’t matching or beating the returns of those market indexes after you subtract the fees you’re paying, you’re losing money. Countless studies (here’s one) have been done comparing the picks of individual advisors against index funds, and index funds almost always win, especially when you track them across several years. If your investments aren’t matching or beating their index counterparts, talk with your advisor about making changes that will keep up with the market. To learn more about index funds, see this article. 

Is thinking about asking these questions making you nervous? I totally get it, and that’s totally normal. The implication is that we should trust the professionals and just let them do their jobs. Then throw in the assumption that we don’t know enough to have input or even understand the answers to our questions. I’m telling you, we’ve GOT to change that. Remember, your advisor is working for you. And a 1% difference in fees can be a very easy change to make and can add tens of thousands of dollars to your pocket in retirement. The more money you’re investing, the bigger that gain or loss will be. 

If your investment advisor is a personal friend or family member, then these questions might be even trickier to ask. Remember that you’re entitled to this information and that these are very basic questions that should be easy for them to answer. Don’t let a personal relationship keep you from being fully empowered and knowing your options when it comes to your financial future. Let them know you appreciate their work and that you’re looking forward to learning more about it. 

Asking these questions will give you peace of mind that you’re on the right track with your advisor. If some red flags come up, don’t worry. Just about everything is changeable, and your future self will thank you for taking the steps you need to build a strong financial foundation in retirement. Keep learning. Subscribe here so you never miss a post, and don’t hesitate to get in touch if there’s anything I can do to help.