Questions For Your Financial Advisor

A good list for those of you who delegate your investing to an outside adviser.

Consider asking these questions of your advisor during your quarterly and/or 2008 year-end review:

1. What were your adviser’s expectations for the stock market’s returns in 2008 and how did these expectations compare to the actual results?

2. How did your investment performance compare to that of the major indices? In what areas did you outperform, and in what areas did you underperform — and why?

3. What was your adviser’s economic and credit expectations, and how did these expectations compare to the actual events? Where and why were his assumptions wrong?

4. Did your adviser change his strategy as economic and financial events changed? If he didn’t, why not?

5. Did you experience outsized individual stock or large specific industry or sector share price losses? Did your adviser institute a discipline to stop losses, or were your losses allowed to compound? Did your adviser "double down" on poor investments?

6. Ask your adviser whether he "eats is own cooking" — that is, did he invest along with you in the same investments, and are both of your interests aligned?

Hat tip: Doug Kass

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  1. leftback commented on Aug 24

    You forgot to ask whether the advisor has purchased a larger yacht recently…

  2. Rob P. commented on Aug 24

    Or… “Is now a good time to invest?” If the answer is yes, then fire his sorry a$$. Especially if he mentions the words “for the long term” as a pansy followup…

  3. anak krakatau commented on Aug 24

    and let’s ask our barber if he did a good job last week and whether we need another haircut next week.

    These questions are obviously overdue and quaint, I think, both from a quality of fin services point of view as well for the sake of shareholder advocacy.

    barn doors flapping, and gonna be a lot of hemming and hawing.

  4. odograph commented on Aug 24

    You know, a Boglehead advisor has easy answers to these. They just set their asset allocation, and make no claim to market prediction.

    I’m not sure that is best for everyone, but it’s interesting.

  5. Rich Shinnick commented on Aug 24

    To be fair to most advisors, they really have two choices 1)Stocks 2)Treasuries. The sad fact (told to me by an advisor or two) is that advising clients to buy gold or commodities, or short stocks is a sure way to end up in court in the advent of losses.

    This goes for many long only investment funds that manage retirement money (for states and government entitites). I was looking at some holdings of various “hedge” funds or “funds of funds” used by various state retirement systems via the SEC filings and there is simply nothing special about their returns and some are way worse than market performance.

    Since many of these contracted managers are limited to stocks, they have no incentive to do other than roll the dice and try for their bonuses. I saw one fund used by several retirement systems that was loaded up (as of June 30th) with FRE, FNM, GS, LEH and I am thinking “why would a “conservative” fund throw so much money in this space? The answer is obvious; if you are paid to run money, you get paid two ways-a management fee which is heavily discounted for managing state pensions and “outsize” gains, so why not shoot for the moon and buy financials which are the biggest “potential” gainers. Would I buy FRE or FNM with my retirement money? Hell no. But many state retirement systems own (via managers shooting for the moon) this stuff.

    So, what is the point? I guess the point is that the system, at times, favors irresponsibility and the incentives and limitations are often all wrong.

    But hey, what would I or you or anyone do if I we had these restrictions? Big dilemma, huh?

  6. leftback commented on Aug 24


    Correct. This is what happens when you set up an entire system with rewards, but no penalties.

    You beat your benchmark, bigger yacht. Fail to reach your benchmark, same yacht as last year. Customer has no yacht. Privatization of gains, socialization of losses.

    I just listened to Danielle Park again, now there is an investment advisor with a strategy and a nice turn of phrase.

  7. m3 commented on Aug 24

    here’s a question i wish people would ask:

    under what circumstances would you NOT invest in stocks, and why?

    remember it’s always a good time to buy or sell stocks. errrr, i mean a home….

    um, maybe i meant t-bills.

  8. Howard commented on Aug 24

    Re; Ask your adviser whether he “eats is own cooking” — that is, did he invest along with you in the same investments, and are both of your interests aligned?

    I submit to you that you never want your adviser in the same investment as yours..
    …because if the thing plunges who do you think he will get out first? His clients? The last I remember (commodity futures) there was a clear formula to protect clients from a broker investing in the same product and a formula for getting out. Usually management would not allow the practice but in a firm that allowed it the Broker had to have a separate account controlled by the manager who wouldn’t allow an exit til satisfied everything was kosher. My last (and worst) experience like this was when I had my clients in a cattle spread in which both ends went against me. I had a client who always wanted to be notified and he was not around. I violated the contract by getting him out without permission and I got myself out first. The SOB tried to sue me however I won in arbitration, but I was judged guilty of getting out first. It cost me nothing because the market had stopped moving against the position…after a killer loss. You do NOT want the adviser eating his own cooking. Not ever.

  9. xtophr commented on Aug 24

    How about advising you to pay down outstanding debt, rather than risking investment in a highly uncertain market?

    Oh yeah, no commission on that one. Nevermind.

  10. Liz Tool commented on Aug 24

    Mr. Ritholtz,
    Where is your new and improved website? Especially looking forward to the e-mail this article feature as my copy and paste skills have shown no improvements (rarely get it on the first try)!! Posts such as this are simply too good not to pass on.
    Thank You!

  11. Terry commented on Aug 24

    Your last question re “eats his own cooking” may not be fair. Clearly what one invests in depends in large part on simple variables such as age, assets available to invest, customer’s sophistication, customer’s investment goals, etc.

    Unless the advisor and the client are more or less clones, they may well be eating different dishes–and both be satisfied.

    OTOH, I’d fire any advisor who wanted me to up my investment in stocks or derivatives at this point.

  12. Fritz commented on Aug 24

    These questions and the following comments are good, but need to be weighted against the reason someone hired the advisor in the first place. If the goal of the hire is to make you rich, then most likely you’re not going to hire a top advisor. The Top help are there to help you define what money means to you, what you want to accomplish for your family and then they keep you on that path. Case in point, xtophr believes it’s better to pay down debt, but the true answer is: “it depends”. What kind of debt and how much? What assets do you have to pay it down with or our you referring to future cash flow? Let’s assume you are referring to future cash flow and you think it’s better to pay more on a house loan with simple interest than it is to put that additional payment into an account earmarked for future mortgage payments. I would argue it may be better to put the $ into a separate account with compound interest. Even if the interest rate is the same, you would be better off with the one growing via compound….. but that misses the point. What’s so great about the additional “equity” in the house when you lose your job and can’t pay the mortgage? Try to get that money via a refi without a job. However if it’s in another account, you’ll be better positioned to ride out the storm…

  13. Thomas Shawn commented on Aug 24

    “To be fair to most advisors, they really have two choices 1)Stocks 2)Treasuries. ”

    And the problem with cash is …….. ?

  14. Simon commented on Aug 24

    Cash has been king for nearly a year now. In a deflationary environment cash wins hands down.

  15. MmsPCSupport commented on Aug 24

    We use a financial planner to add the “voice of expertise” (read “break deadlocks”). My husband wants to be fully invested up until this last month. Then he said, “Sell all equities.”

    He still doesn’t accept cash as an investment class. I’d be invested in a great deal more cash w/o my husband’s bias – based upon a class he took while getting an MBA about 40 years ago. As it is, we have an extremely conservative portfolio of funds with quite a bit of international bond funds. We also have a bond ladder to handle cash needs, fwiw.

    At least I pretty well avoided funds w/ heavy financial investments.

  16. Andrew Horowitz commented on Aug 25

    It is a good thing that these questions are put together in an unbiased manner. I think that Doug is short biased ..right? or is the 100% short only? I forget.

    Anyway, there are obviously many more questions to ask in order to find a good advisor.

    Question #1 stops at 2008.. why?
    Another question wants to know how portfolios have done as compared to an index.. hopefully a good advisor is non-correlated, so what is the point of that question?

    The final question asks if the advisor eats his own cooking.. Come on, I advise a range of clients that have a range of risk and we may use munis or other instruments that I may not have in my portfolio.

    This is list is a good way for a broker to lead a client to them as they already know the answers, not a list prepared by a trusted, unbiased and seasoned advisor. Nice try though..

    (plug coming) A much better list is in my book: The Disciplined Investor – chapter 9 and 10 provide a good guide.

  17. The Financial Philosopher commented on Aug 25

    While benchmark comparisons are worthy of note, absolute returns trump comparitive returns. The client’s “benchmark” should be the return required to meet the client’s objective — not “the market.”

    While traveling from Point A to Point B, it should not matter if other people are passing you along the way. What matters is arriving on time or early, and most importantly, unharmed.

    If the client requires a 6% return and the advisor provides 6.1%, then the objective is met. If the market returns 12%, so what? If the client complains, then they have not been educated properly on risk management. If they want to find another adviser, then the adviser is better off without this kind of client, anyway.

    With that said, any adviser worth the fees should easily beat stock indexes in down years, as 2008 looks to be, and the same adviser would likely be behind stock indexes in up years.

    The best advisers will educate the client on risk management and steer them away from “beating the market,” which only invites emotions to defeat the objective.

    “It is easier to exclude harmful passions than to rule them, and to deny them admittance than to control them after they have been admitted.” ~ Seneca

  18. Steve Dallas commented on Aug 25

    The standard 401k really leave you with not much flexability. All of the funds offered end up being some sort of index fund with no shorting or market timing in them which leads the client with the hardest descision: market timing.
    As for my 401K I think I’m going to just try to construct a portfolio of half “total stock market index” and half treasuries. I heard that you will get about 80% of stock market return and half the beta over time.

  19. ben commented on Aug 25


    Doug Kass is great but this post isn’t really worthy of the title. It should be what to ask your Investment Advisor as all the questions are only related to Investment. A true advisor is doing much more with his/her clients than only discussing the investment portfolio and what changes have been made in the portfolio in the last 12 months. More imporant, as recognized by others above, the “own cooking” question is silly. Many factors need to go into an investment decision age, time horizon, risk tolerance, past experience, income, asset level, etc. I personally do not find it important to ask your advisor if they invest like you, only if your investments align with your investor profile and long/short term investment goals.

  20. Dave commented on Aug 25

    I think are innumerable questions to ask of an advisor prior to working with one. I am a former “Financial Advisor” from a highly regarded large firm, am a CFP(r) practitioner and I am still quite young. First, the client has to really understand the nature of the relationship, so 1. is he working with a broker selling investments 2. a financial planner who will advise on allocation 3. just having his money managed in a separate account by an RIA or an invest mgmt firm (which seems to be nothing more than a mutual fund with better clarity, etc).

    SO there are many questions to ask if any part of the relationship is financial planning oriented primarily with investment management as a subset of that. If it is only investment management that is concerned here, then is it a broker selling investments or IM firm managing a separate account.

    If it is with a broker, the broker/”financial advisor” has no incentive whatsoever to keep the money parked in anything short-term and liquid, except for keeping the money under his aegis and later earning a commission of sorts. Most( but definitely not all) brokers derive/regurgitate their opinions from the morning call or the institutional research meant for institutional clients, and in my experience the brokers i’ve met haven’t had the necessity or ability to truly research and create their own opinions, (it’s not a bad thing) but it’s because their in sales not portfolio management.

    In working with a investment manager through a separately managed account, especially those sold by brokers, it is somewhat deceiving. Like mutual funds they have mandates (generally) as to what they can buy and to what extent they can/will go to cash, but my guess is that they will never go anywhere near majority cash. They are paid to buy equities/bonds etc. A sure sign of having been sold a bill of goods and not an individualized portfolio is if you invest your $x00,000,… and the majority or all of it is invested within a matter of days. Most SMAs will be fully invested lickidy split, without regard to current market conditions.

    Sorry for the lack of brevity, but my main point is that the best questions to as an advisor are those that will truly outline the nature of the relationship, how the advisor will be comp’d as this will explain the motives behind the moves. Thanks

  21. Mark E Hoffer commented on Aug 25

    The standard 401k really leave you with not much flexability. All of the funds offered end up being some sort of index fund with no shorting or market timing in them which leads the client with the hardest descision: market timing.
    As for my 401K I think I’m going to just try to construct a portfolio of half “total stock market index” and half treasuries. I heard that you will get about 80% of stock market return and half the beta over time.

    Posted by: Steve Dallas | Aug 25, 2008 10:44:06 AM

    Steve, you’d be better off burning cash in closets..forget about beta, even alpha, think preservation–also, while you’re at it, find out who really owns your 401(k)..

    now is it not the time to go by “what one has heard”..

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