Any person working with a financial advisor needs to make sure they ask a few basic, but very important questions. If you follow Jason Zweig, he created a great list a few year ago. You can find it here.
Here are our answers:
1) Are you always a fiduciary, and will you state that in writing?
Yes without reservation! Some advisors may only act as part-time fiduciaries, but not here. I will always act to support your best interests. You can find a link to a copy of my fiduciary pledge at the bottom of this page.
2) Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services?
No. My only source of income is the fees clients pay me. I don’t get kickbacks for selling you insurance or investment products. I doubt any mutual fund companies will offer to take me out on the golf course anytime soon.
3) Do you participate in any sales contests or award programs creating incentives to favor particular vendors?
No. I’m not in the business of trying to earn a trip to Hawaii by convincing someone to buy whole life insurance or an awful annuity. I’m laser focused on helping clients in a thoughtful and honest way. Sleeping well at night is key, and I couldn’t do that if my advice was biased by sales incentives.
4) Will you itemize all your fees and expenses in writing?
Without a doubt. See here. Clear, sensible, transparent.
5) Are your fees negotiable?
Yes. I believe that I ask a fair price for my services and offer great value to clients in return, but sometimes will offer a discount depending on certain circumstances.
6) Will you consider charging by the hour or retainer instead of an annual fee based on my assets?
No asset-based fees here. I believe my flat fee structure offers the best value for clients at a fair price.
Asset-based fees often focus advisors on gathering assets as opposed to doing what’s best for the client (e.g. the classic 401k rollover situation). If I recommend that you rollover your 401k to an IRA, I don’t get paid more, but an advisor billing 1% of your assets sure does.
I decided not to use hourly fees because they can sometimes cause clients to hesitate when reaching out to me, and I wanted to avoid that.
7) Can you tell me about your conflicts of interest, orally and in writing?
For sure. Like every advisor, our business model has some conflicts, but I’ve worked hard to reduce them as much as possible. I want my clients to hang around for a long time and pay me every year. But my income doesn’t change if they take money out of their portfolios to invest elsewhere or refuse to rollover their 401k so that I can manage it. If you decided to handle your portfolio on your own and pay an hourly fee for planning, we might not be a good fit.
I do have a financial motivation to take on new clients, so that represents a conflict. I will mitigate that concern by limiting my client base to a sustainable size so that my clients can still get great service.
8) Do you earn fees as adviser to a private fund or other investments that you may recommend to clients?
No. My single source of revenue is the flat fees paid by clients.
9) Do you pay referral fees to generate new clients?
No. I have a good network of CPAs and attorneys who can refer clients to me. When meeting with a CPA or attorney for the first time, I may offer to pay a reasonable fee for their time or professional advice. But no referral fees have been or ever will 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?
In addition to investment management, I provide comprehensive financial planning. Financial planning is a broad term, but in a nut shell, I help clients reach their financial and life goals, protect and grow their wealth, and assist with any unique financial concerns. We will look at areas including cash flows, taxes, retirement income strategies, insurance, risk management, prudent debt utilization, education planning, wealth transfer, and philanthropic planning.
11) Do you earn fees for referring clients to specialists like estate attorneys or insurance agents?
No. Refer to #9.
12) What is your investment philosophy?
I employ an evidence-based investment process. That means using high-quality investment products to build a diversified, low-cost, and passive investment portfolio. Another way to think about it… do less, but do it better. I help clients plan for market downturns so they can stay disciplined and invested for the long term. We agree on an investment policy statement (IPS). Trading will happen rarely. Trades are placed when your asset allocation is out of balance or something big changes in your financial life or if you need to add or remove funds from the portfolio.
13) Do you believe in technical analysis or market timing?
No. When I first started in finance, I was a commodities trader at a major bank. We employed technical analysis in an effort to forecast the future price of crude oil and copper and time the market. In my experience, it never really worked. Every once in a while, someone on our trading desk might get lucky, but over time I discovered that technical analysis and market timing did not offer much value. Some people might have the “gift” of being able to time the market, but I sure don’t and neither do most people.
14) Do you believe you can beat the market?
No. Like technical analysis and market timing, I believe the evidence demonstrates that beating the market is close to impossible. For sure, there are individuals with once-in-a-generation investment talent (e.g. Warren Buffett) who have put together fantastic investment track records. I’m am no Warren Buffett, and neither is any other financial advisor. If a financial advisor claims they can beat the market, ask them, “Well, why haven’t you raised investor capital and started an investment fund?” In my experience and given the number of institutional investors out there trying to outperform the market, any truly talented money manager could be a billionaire in less than 10 years.
15) How often do you trade?
As mentioned in #12, trading will happen rarely and as seldom as possible. If you need to add or remove cash, that will generate some trades. Rebalancing trades won’t happen more than once a year and only if there is a significant difference (15-20% or more) from the target allocation. Our general trading philosophy is “Don’t just sit there, do nothing!” We don’t trade in response the what the Russian wheat harvest looks like or what the latest news on Reddit is.
16) How do you report investment performance?
Clients receive a report every quarter and have daily access to performance data through an online portal. These performance figures include all available costs including my fees. I’m not able to precisely account for taxes in performance data, so the best we can do is estimate. Reports also show the performance of relevant indexes (inclusive of dividends and interest) as well so you can make a true apples-to-apples comparison.
17) Which professional credentials do you have, and what are their requirements?
I am a CFA® Charterholder and CERTIFIED FINANCIAL PLANNER™ practitioner. These credentials are important. The CFP is the standard for financial planning and any serious planner should be able to clear this bar. The CFA program provides a great exploration of investment management principles. And if nothing else, these credentials demonstrate a significant commitment to lifelong learning and skill improvement, which every advisor should aspire to, but unfortunately many do not. You can find requirements for these credentials here and here.
18) After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term?
Right now most people can expect nominal (or pre-inflation) returns around 6%. Let’s assume taxes, fees, and inflation reduce that by 3.0%-3.5%. So you end up with a real return of 2.5%-3.0%. Conservative clients can expect lower returns. Super aggressive investors might do better, but only over long time periods. Over time expected real returns could increase somewhat (perhaps closer to 3.0%-4.0%), but don’t hold your breath for a reemergence of the returns from the past 40 years. If you want real returns of 8%-10%+ per year, you’ll need to look elsewhere.
19) Who manages your money?
I manage my own money and use the same investment approach and funds that I recommend to clients. I follow the same process. It’s not super exciting, but it works. And I can find excitement outside of my investment portfolio.
Honesty is the first chapter in the book of wisdom.
-Thomas Jefferson
