The Smart Questions Clients Ask

How much will your financial advisory services cost me, all-in?

What will the additional trading costs be, if any, to implement your strategy?

What are the internal expenses of the funds you use, if any?

What might the taxes on gains or income look like, on average?

Are there costs associated with our transactions that I may not see but will have an effect on my net returns?

These are the questions we get from the smartest people who inquire at our firm, either early in the process or sometime down the line before they hire us. Not everyone knows to ask these questions, so if they don’t we will bring up the answers anyway.

Smart investors don’t obsess over performance track records, they ask about costs and conflicts. They know that any advisor can show them a proposed portfolio filled with funds that “beat the benchmark” over the last few years, but that this is actually the least important aspect of the decision.

According to S&P Dow Jones Indices’ SPIVA persistence scorecard, past performance is literally irrelevant. Of the 706 domestic stock mutual funds that were in the top quartile of performance in September 2010, only 1% of them were still in the top quartile for the five years ending September 2014. One percent. If you’re paying high costs for someone’s past track record, you might want to seriously rethink that. If your first question of an advisor concerns their proposed portfolio’s track record, you’re going to get exactly what you’re asking for – the wrong information.

One of the things I’ve learned from Howard Marks, who is not a financial advisor but a money manager, is that the key to working for investors is “Tell people what you’re going to do, and then do it.” We’ve organized the practice around this mantra, to the best of our ability. Part of this includes offering transparency around costs – both explicit costs and the indirect ones that sneak up on you.

“How much will you charge me each year?” Well, depends on how often we trade and what products I sell you. “OK, here’s 4 million dollars”

— Downtown Josh Brown (@ReformedBroker) March 3, 2015

But there are many players in my industry who gloss over this part. They inherit clients from the banking side of their firm or get referrals from friends or play golf at the right country club and, in all the schmoozing and power-pointing back and forth, they are somehow able to close business without even getting into this stuff. That’s worked for a long time, but it’s not going to anymore. The web has busted this wide open. As Johnny Cash sang, “You can run on for a long time…”

If your financial advisor is not able to give you straight forward answers to these smart questions, it’s up to you to decide whether or not that matters. I understand that people do business with people they like, and that prestigious brands have curb appeal.

But we live in an era of incredible choice. It wouldn’t be the worst thing on earth to take advantage of that fact.

Two brand new posts worth reading on the topic:

Questions to Ask a Prospective Financial Adviser (Carl Richards)

Is your financial advisor acting as your fiduciary? (Kris Venne)