Having a financial plan is critical to having a successful future. Without a plan, you would just be drifting through life financially. Luck is not a strategy.

Even if you feel capable of managing your financial future and making investment decisions on your own, the reality is that we all have blind spots. Having an independent third party review your situation and provide recommendations is very valuable. You may hear of some things that you never of thought of. Even if you don’t hear anything new, there is value and peace of mind knowing that you are on the right track.

Let’s get right into some key questions to ask your advisor during your annual financial review.

Question: Do you have a written statement that declares you as being a fiduciary that I can have for my file?

This is probably one of the best questions you can ask, because it gets at the heart of who you have hired to help you. A fiduciary is required to do what is in your best interest. However, the financial services industry is full of “financial advisors” that are not fiduciaries. 

It sounds ludicrous, but essentially that means that they can do what is in their best interest instead of yours. An example of this is that they can put you in an investment that pays them a high commission or high ongoing fees instead of another investment that would be less expensive or fit better with your goals. That is wrong! 

Question: I understand that investment fees can have a significant impact on my returns over time. Can you please explain the fee structure for my investments and how they impact my returns?

This is another very important question. The fees you pay have a huge impact on your investment account balance over time. You want to understand the fees so you don’t have any surprises or regrets later on.

Listen carefully to the answer you get. A Fee-only certified financial planner will usually be your most economical option. This would be like hiring any professional (lawyer, accountant, etc). You pay a fee for the time they spend working on your account.

If you hear the words “fee-based” or “Assets Under Management (AUM),” you are paying differently. This is where the costs can become disproportionate to the services being performed. Paying high fees can reduce your balance at retirement by 10 – 20% or more compared to someone with lower fees. See this SEC article for an example.

If you want to know more about the differences between fee-only advisors and fee-based advisors, please see this article.

Question: What was my portfolio’s performance for the past year and how did it compare to the return of the market? Please explain the reasons why I did better or worse last year?

Using the market average is a reasonable benchmark to compare results. Be sure that you are comparing apples to apples. If your portfolio is 60% stocks and 40% bonds then you want to know how your portfolio performance compares separately to the stock market and the bond market portions.

However, don’t get too hung up on one year of past performance. One year is just one data point. It’s the trend over a number of years that tells the story. Does your portfolio regularly lag, meet, or beat market results? Are you satisfied with the results and is it helping or hurting you on your path to achieving your financial independence or retirement goal?

Be careful of the typical tendency to chase returns. Chasing returns means you want to buy the investment that did the best the last year or last few years. This is human nature but it often backfires. Funds and investments tend to go in cycles, which means that the higher performers today often are the weaker performers tomorrow. Often a more successful strategy is to follow a systematic approach, stick to your investment philosophy, rebalance your portfolio on an annual basis, and avoid emotional decisions or chasing returns. In other words, having a long term focus with reasonable tweaks along the way. A good financial professional will guide you through this process, especially when the market is down and the emotional tendency will be to abandon your plan.

Question: How can I optimize my portfolio’s tax efficiency and are there any tax-saving strategies we should consider?

Tax discussions should be part of your annual review process. Tax loss harvesting by selling losing investments is a basic strategy that should be discussed every year. 

Other strategies such as setting up a Donor Advised Fund and optimizing your withdrawal mix from taxable brokerage accounts and retirement accounts to minimize the tax impact in any given year should be discussed as well.

Question: Are there any updates or changes needed in my estate planning documents, such as wills and trusts?

It is important to ensure that your planning documents are in order. This should already be part of your annual checkup. Beneficiaries should be reviewed each year and your Will or Trust documents should be updated if necessary. It is disappointing to hear of cases where old beneficiaries (ie: ex-spouse) on a retirement account were never removed before the estate owner passes away. Be sure that everything is in order so that your assets get distributed in accordance with your wishes.

Question: Do I have adequate insurance coverage? Are any changes or updates needed due to recent life events?

It is important to have the right insurance coverage. You need the right amount. You don’t want to be short, but you don’t need an excess either. For most people, an adequate amount of term life insurance will do the job. When you start getting into the complex whole life and related products, you being to wrap investments with insurance and the waters get muddy, and not in your favor.  This is where having a fiduciary as your advisor is key. This will ensure they are working in your best interest rather than selling you high cost insurance products.

Question: Is the standard stock and bond portfolio the best investment strategy to reduce volatility and therefore increase my safe withdrawal rate in retirement?

The standard 60/40 stock and bond portfolio has been a mainstay for investment advisors for a long time. This goes back decades. With better information today and the ability to include alternative investments, there should be some serious consideration to including some other uncorrelated investments in the portfolio mix. 

Having a better mix of uncorrelated investments will lower the volatility and increase the safe withdrawal rate of your portfolio. For more information on some alternative options to the standard 60/40 portfolio, see this article. You want to understand all of your choices related to good portfolio management. Your advisor should be able to explain the risk and reward of these choices.

Question: How long will it take to hit my financial independence / retirement date based on my current portfolio and savings rates? If already in retirement, how long is my portfolio projected to last given my current spending levels and projected investment performance? What adjustments should we make to improve?

These are critical questions to determine if you are on track, and what adjustments need to be made to get back on track to achieve your long-term goals. You want to keep making small adjustments (adjusting spending, savings, portfolio mix, etc ) every year so you are not in a position where you need to make drastic changes later. In other words, what adjustments can you make in the coming year to keep your plan on track?

Question: What is my net worth? How does it compare to the prior year and what is the multi year trend.

Your net worth statement is your personal balance sheet. It should show your assets, less your liabilities, to arrive at your net worth (equity). This should be a basic and standard statement provided to you at least annually. If you are a regular client you should be able to check on this more frequently by logging into your online account.

This statement really shows your cumulative lifetime financial results at that moment in time. It is a good measuring stick to compare where you are today and how you have improved this number over the years. In addition, you should have a target as to what that number needs to be in order to hit and maintain your financial independence goals.

Question: Are there new laws that went into effect in the last year or upcoming next year that will impact my financial plan?

It is important to understand the new laws and their impact on your financial situation. Often these are tax related changes, such as tax rate changes. They can also be related to adjustments to the RMD age (Requirement Minimum Distribution) and options related to 401K plans, Individual Retirement Accounts, etc. A good financial advisor will have a solid grasp of these changes to help determine what impact it might have on your specific situation.

Potential financial advisor options to consider

There are some good fee only financial planners out there. With the ability to use video conferencing, you can now hire planners anywhere in the country. I have personally used two different planners (to review and confirm my financial plan) and they were both out of state. Having a few video conferences and trading documents and questions via email worked out great. 

NAPFA’s Position

The National Association of Personal Financial Advisors (NAPFA) requires their members to be fee-only planners. NAPFA members are not allowed to receive payments from any other sources other than their clients via the fee-only model. Referral fees, commissions from brokerage firms, insurance companies or mutual funds are not allowed. You can read more about and find a planner that meets this criteria at  Napfa.org.

Two fee-only firms that may also be worth looking into are the XY Planning network and the Garrett Planning Network. Both are fee-only firms that have lots of financial professionals with good reputations for providing advisory services that meet a variety of financial needs. 

Do your due diligence and put more effort into choosing a planner than deciding where you are going out to dinner. Interview at least a few planners and choose a person that meets the fiduciary standard that you would be comfortable to work with. Your financial future is too important to wing it!

Executive Summary: Questions to ask Your Financial Advisor Each Year

  • Even if you are very confident in your financial situation, we all have blind spots in our thinking or knowledge
  • Having an independent view of your situation for a fixed fee is a good idea
  • There are important questions you need to ask your financial advisor
  • Making sure they have a fiduciary duty to act act in your best interest is the most important one!
  • Also an independent fee-only planner instead of a fee-based planner will likely be much better for your financial future
  • You should ask questions on your investment portfolio performance relative to the market 
  • You should ask questions regarding tax planning and insurance optimization
  • You should ask questions to ensure your estate plan and related beneficiary documents are up to date
  • You should ask questions about your portfolio mix both before and after your financial independence / retirement date
  • Don’t just settle for the standard 60/40 portfolio without understanding more diversified options to improve your portfolio
  • Your net worth is an important measuring stick of your cumulative financial picture over time
  • NAPFA can help you find an independent fiduciary financial planner

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