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5 Questions to Ask Your Financial Advisor in 2021

Updated: Jul 12, 2023

Breaking News:

The world was shocked to see riots on Capitol Hill many believe were incited by President Trump who later fended off a second attempt at impeachment. New strains of COVID-19 emerge while vaccination distribution flounders. Struggling retailer GameStop sees their stock rise 1,600% in just two weeks causing a massive short squeeze resulting in hedge funds losing billions of dollars.

Correct me if I'm wrong, but I never recall there being more than 365 days in any one year. Yet is seems like 2020 straight refuses to end!

Be that as it may seem, the market as a whole has performed well. Stocks are up through the beginning of February 2021 and is appears more stimulus money will be entering the hands of Americans should President Biden's COVID relief bill pass. And if recent history is any guide, savings rates will continue to rise causing asset prices to inflate as a result of new entrants scurrying into the stock market casino.

If you weren't sitting in cash or caught up in some wacky managed futures fund, you should expect to see fairly decent returns in your portfolio for 2020. A standard 60/40 index fund portfolio of stocks and bonds (VTI and BND) returned more than 15% last year.

Favorable market returns like these often pave the way for pleasant review meetings with your advisor. You'll hear how well your investments performed, probably get an update on the market and economy and then you'll be on your merry way.

Colin Powell once said: "If it ain't broke, don' t fix it is the slogan of the complacent, the arrogant or the sacred. It's an excuse for inaction, a call to non-arms."

It's very easy for advisors to deliver investment results to clients when they're good. It's even easier for them to focus too much on the good, leading them to gloss over impactful changes that could be made and focus more on glorifying past results. Why fix what ain't broke, right?

I may not know you, nor what's in your investment portfolio. You may have the perfect blend of stocks and bonds and an expertly crafted financial plan that requires little to no modifications going forward.

What I do know is that tax reform is on the horizon and will affect everyone, rich or poor. I know what happened with GameStop stock should not be ignored and will likely change how certain markets trade forever. I know it's foolish to continue to discount Bitcoin as a fad like a lot of people do. I also know the only certainty about the future is uncertainty, and change.

What worked for you in 2020 may not work in 2021. No matter how well your investments performed last year, change is coming and it's not for the complacent at heart. Here are five questions you should consider asking your financial advisor during your next investment review:

5 Questions to Ask Your Financial Advisor in 2021

1. How did my investment performance align with my financial goals?

This question assumes you in fact have financial goals that your advisor is monitoring throughout the year, on top of your investments. For purposes of this post, I'll assume you have a financial plan in place (If you don't, skip to #5).

Performance is one of, if not the most emphasized piece of financial data your advisor will focus on, so you don't have to worry about asking how your account performed as that will most certainly be covered in your meeting. What may not be, however is performance relative to your financial goals.

For example, let's assume your investments had a total return (meaning interest, dividends and appreciation) of 8% net of fees: not too shabby. But if your spending rate in retirement warrants a minimum annualized return of 10% to minimize the risk of running out of money, then you'd probably want to know that and make the necessary adjustments.

Remember, investment performance is merely a number. Clearly defined financial goals help give that number meaning and purpose.

2. What strategic moves were made during the year that contributed most to my success?

Unless you're one who intently watches your investment account on a daily basis, you may not know what changes, if any, your advisor is making in your account. Granted, you may not want to know and take solace in the fact you're paying someone to worry about this stuff so you don't have to.

Even still, it's good to have a basic understanding of how your money is being managed.

Technology has made it easier for advisors to manage large swaths of client portfolios with a few clicks of a button. In some cases, investment management is outsourced to another advisor or tech platform, meaning client accounts are in a sense on "auto-pilot" and being managed by an algorithm rather than your human advisor.

None of this is necessarily wrong per se as technology can enhance an advisor's capabilities and improve the client experience. But if you're paying the industry average 1% for your advisor to just manage your investments, it's good to know what what you're paying for as the typical robo-advisor, which just focuses on investment management, costs between .25% and .50%.

And if you don't know what you're paying in fees, ask!

3. Other than spending time managing my portfolio, what other work was done on my account throughout last year?

Most professional accounting and legal service firms provide their clients with invoices itemizing their time and fees. Take a law firm for example. Say what you want about attorneys and billable hours, they almost always provide a detailed breakdown of how they spent their time working on your account. See generic example below which I can confirm is consistent (from a disclosure perspective) with what I've seen from attorneys in the Erie, PA market.

Why then don't financial advisors do this? Fees are often hidden within a sea of mutual funds or buried somewhere in a quarterly investment statement. And for advisors that are required to send fee notifications to their clients, rarely do they summarize what they've done in order to earn their fee.

For someone with a $1 million dollar IRA who meets with their advisor twice a year and pays 1%, I have 10,000 reasons why you should consider gaining a better understanding of what they're doing for you on an annual basis.

4. What happened with GameStop exactly and how will this impact the market/my portfolio?

Fortunes were won and lost over the course of a few weeks when GameStop, a beaten-down video game retailer on the verge of bankruptcy, saw its stock price spike more than 1,000%. The cause of this meteoric rise (and precipitous fall soon thereafter) has been a popular topic of discussion amongst the financial community with most of the experts citing short squeezes, the Reddit community and options trading as the primary culprits.

I'm not here to opine on Robinhood, short-selling or payment for order flow, each of which played a role in the GameStop frenzy. That's a topic for another blog post.

What I do want to emphasize though is the importance of assessing whether or not your advisor's financial guidance and commentary is truly reflective of what's happening in today's market.

Do they have an opinion on Bitcoin and cryptocurrency and if so, what is it and how was it derived? When asking about GameStop, did they explain how a short squeeze works and why short-selling certain stocks may prove difficult in the future, despite it being an important component of trading in the financial markets?

For years, professional advisors and institutions told you to avoid Bitcoin given its speculative nature. They bet against Elon Musk and said Tesla was vastly overvalued. Today, Bitcoin's market cap is hovering around $900 billion and Tesla is now the eighth largest company in the world.

I'll be the first to admit I don't know when, if ever, speculative investments such as Bitcoin and Tesla will become widely accepted by advisors to use in client portfolios. A good advisor, however, should be keenly aware of the latest trends and emerging technologies disrupting the markets and well positioned to adapt their investment philosophies and strategies to benefit their clients.

5. What's the plan for 2021 and going forward?

In 2020, domestic stocks once again outperformed international. Value stocks underperformed their growth counterpart. And small cap stocks surged later in the year and are one of the best performing asset classes thus far in 2021. But history as they say, is only a guide.

There's no guarantee what performed well last year will repeat in the future. That's why it's a good idea to gain a clear understanding of what your investment plan looks like for the remainder of this year and going forward as changes may need to be made.

At a minimum, be sure you know how often your account is rebalanced, or adjusted back to its target. Most advisors should be rebalancing at least once a year if not more. That includes tactical changes (i.e. shifting weightings in domestic and international stocks) as well as broad adjustments between stock and bond holdings. And if you have a taxable investment account, you may want to inquire whether tax-loss harvesting opportunities would be beneficial.

If you don't have an overarching financial plan at this point, now is a good time work with your advisor to develop one.

Final Thoughts

From former Starbucks CEO Howard Shultz:

“I think the currency of leadership is transparency. You’ve got to be truthful. I don’t think you should be vulnerable every day, but there are moments where you’ve got to share your soul and conscience with people and show them who you are, and not be afraid of it.”

Financial advisors have a tendency to demonstrate their professional competency by speaking "Wall Street" lingo and using phrases meant to confuse and bewilder their clients. Often times you don't understand what they're saying during a review meeting or how they're managing your investments. You may even feel embarrassed to ask a question at the risk of sounding dumb. This is not the way it should be.

Thanks to the Internet, information is now abundant and free-flowing, available to anyone with a computer or smart phone. If you want to learn how to fix your leaky faucet, YouTube has 1 million videos that will walk you through the process. If you want to start trading options (God forbid), you can learn that too.

Transparency is at the forefront of our culture. Do yourself a favor and make certain it's also a cornerstone for your professional relationships. Don't be intimidated with asking a dumb question as there's no such thing. You're paying tens of thousands of dollars to have someone manage your money and deserve to have complete transparency around anything and everything affecting your financial life.



Image by Aaron Burden


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