How do you know that the advice of a particular financial adviser is worth paying for? JOHN DE GOEY says it’s all about asking the right questions. In the final part of our serialisation of his book, STANDUP to the Financial Services Industry, he suggests three questions you might want to start with.
In the end, the decision to hire an adviser usually comes down to the same thing that all financial decisions are based on: value for money. The problem is that most people hire an adviser because they feel they cannot do it themselves. Of course, if you can’t do something yourself, how good will you be at assessing the job someone else is doing on your behalf?
The simple truth is that much of what advisers say is presumed to be valuable but is in fact non-sensical. For instance, when an adviser says it’s a “stock picker’s market”, you need to understand that statements like that are utter rubbish, and call your adviser out for saying it in the first place.
Whenever a stock is traded, there is a presumed winner and loser. Since both traders are, by definition, stock pickers, then how can the winner win without having the loser lose? One is a direct consequence and necessary pre-condition of the other. Winners and losers always cancel one another out.
As such, the market for stock pickers is always the same whether the market is inflationary, deflationary, in expansion, in contraction, running in an accommodative monetary policy, running in a restrictive monetary policy — or any other variation of circumstances. It is a simple truism that trading stocks is a zero-sum game before costs and a negative-sum game after costs, including transaction charges and taxes, are considered.
A significant part of the value proposition is whether your adviser is seeking out low-cost products and passing the savings on to you as a value-add. It is considered a best practice in financial planning circles to make plans using not only reasonable assumptions for benchmark returns, but also to lower those expectations by all costs incurred along the way. The concept of a penny saved is a penny earned starts to hit home when advisers are asked to illustrate potential outcomes using a sensitivity to cost.
Ask the right questions
The message here is that investors need to overcome their fear of asking tough questions by forcing accountability on their advisers.
Here are there questions you might want to start with:
How do you choose the funds you recommend to me?
The answer better not have anything to do with past performance because as every prospectus and mutual fund advert says, “past performance may not be repeated and should not be relied upon.”
What rate of return should I expect?
The number better be in the single digit range (and in the low single digit range if there is a significant income component). It should also be lowered further to reflect the cost of products and the cost of advice.
What motivates you to look for low-cost products on my behalf?
As was suggested in the previous question, returns are frequently lower for more expensive products with a similar mandate.
Remember, many advisers have got away with spouting platitudes and using circular arguments for far too long. No one cares more about your money than you do, so you need to stand up to the industry to protect your legitimate interests as the person who is paying.
For more information about John De Goey and his work, you should visit his website.
Picture: Evan Dennis via Unsplash
