Our last post discovered the importance of taking the time to carefully check out an investment advisor before turning over your hard-earned money for them to manage. This post provides a list of questions to ask yourself about your current and past investment advisors. This list was previously published in an article we wrote for the Oakland Insider insert about a year ago. Many of you may have already seen it. Regardless, it’s good to periodically reassess your investment advisor’s performance.

- Have your investment advisors spent time trying to understand your overall financial objectives?

- Did they clearly and completely explain how they are being compensated? If an advisor says to you “I don’t make money unless you do”, we’d suggest you run for the nearest exit. We are unaware of any fee arrangement where that statement would be true.

- If they recommended that you purchase mutual funds, did they explain the differences between Class “A”, Class “B”, Class “C” and other classes of mutual funds? Did they explain the commission and fees involved with each?

- Did they make you aware that investing larger amounts of money may qualify you for discounts when buying “A” shares of mutual funds? Or, did they just recommend class “B” funds without explaining that they include back-end fees for several years (usually five or more), while at the same time carrying higher annual management fees than class “A” funds?

- Did they make any attempt to explain all the different types of risks involved in investing?

- Did your advisors make any real effort to understand your risk tolerance? Or did they just ask if you wanted to be conservative, moderate or aggressive? These are very subjective terms that mean different things to different people. Understanding one’s tolerance for risk requires a more in-depth approach.

- Did they explain the different types of investments that are available, along with the pros and cons of each?

- Did your advisors make any attempt to provide real diversification in your portfolio? Having three or four different funds does not provide the needed diversification when they are all domestic, large-company funds. And, if they only handled a portion of your portfolio, how could they provide the overall diversification that you needed?

- Are the investments your advisors recommended in sync with your risk tolerance? Recently, the portfolio of one of our clients contained a “Diversified Futures Fund”, a highly-risky fund that invested in all types of futures and/or derivatives (investments whose values depends on or are derived from the price of other assets). These types of investments are highly speculative. What’s more, the fund had to earn 8.5% just to cover its expenses! And, to make matters worse, our client had indicated to his advisor that he was a moderate-risk investor.

- If your advisors have recommended that you place your investments in a “managed account”, with the investments overseen by various asset managers, was the cost clearly disclosed to you? This type of account can typically cost 0.5% to as much as 2% or more of your account’s value, per year. That may be OK if the managers do a really good job.

- Has it been ages since you’ve heard from your advisors? Do they make an effort to keep your portfolio balanced, or are they more interested in getting new clients? If they have not recommended any changes in the last couple of years, something is likely wrong. On the other hand, if they call every month and recommend a new hot stock, they may be trying to churn the account to generate commissions.

- Have your advisors recommended buying an annuity for your IRA account? The main selling feature of annuities used to be their tax-free growth. But IRA accounts already grow tax free. Therefore, one of prime benefits of an annuity has no value in a retirement account. Annuities often have surrender fees starting at 7% or 8% and then declining to zero over six or seven years (sometimes longer). Advisors often never mention surrender fees. Surrender fees act as a deterrent to moving one’s assets elsewhere and therefore reduce one’s flexibility.

- Finally, have your advisors really listened to you when you talked to them? Did they speak in language you could understand? Did they have your best interests at heart?

The above items address some of the major issues investors should be aware of. We highly recommend you take time to answer them to make sure your advisor is acting in your best interest.