Recently we received a call from a financial planning client that we did some work for a few years back.  At the time, we developed a comprehensive financial plan which included a well thought out investment strategy.  The client investment assets were scattered throughout various investment companies and among a variety of individual stocks, and mutual funds, many of which were assessing 1% plus in operating expense charges.  The level of risk was beyond what the client needed to accept to realize her goal of not running out of money before she died.  In other words, she had plenty of money to see her through.  The placement of the investment vehicles between retirement accounts, Roth IRA’s and regular IRA’s did not make a lot of sense.  Too much was being taxed at higher tax rates than needed to be.

While not complicated at the time, her situation did require some analysis work to optimize her holdings.  She seemed pleased with the work we did and was armed with a plan for moving forward.  The only remaining question was how to implement the plan.  Then radio silence ensued.  We heard nothing from her despite several attempts to follow-up to make sure the investment plans were being implemented, until recently.

She called us back two years later wanting us to examine her investment account statements from the broker/advisor that her son set her up with two years prior.  Apparently, things were not going along as well as she had hoped after transferring her accounts to the new advisor.  She trusted us clearly as was evidenced by calling us again, but she had been influenced by her son to use the investment advisor that he uses rather than us or some other low-cost investment manager.  The problem was there was a tremendous amount of trading going on within the account.  She referred to it as jackrabbit investing as she was getting sell and buy confirmations weekly without any clue as to why.  Upon further review, these were not rebalancing trades of relatively small amounts.  They were complete replacements of one fund for another.  Clearly, there was an “investment wizard” in some home office who was managing the trading desk, and when they deemed an investment style or product no longer relevant for the model the wizard was running, it was swiftly sold and another product purchased.  Therein lies the jackrabbit.  This was not a customized portfolio designed specifically for the client; this was a “managed” process where the investment advisor uses trading activity to justify their advisory fees.  That is their value.  It’s how they think they add value to a client relationship.  Many advisors work this way.

This client, however, knew enough to know that frequent trading is not usually the best investment approach.  Her deceased husband used to talk about why buy and hold was a better approach.  The other thing she knew was that costs matter.  But she never thought to ask what the operating costs of the products she was investing in were.  She had no idea what the advisory fees were either — not a lot of transparency going on in this relationship.  Frankly, sometimes we think that advisors try to confuse clients with a lack of information or by providing meaningless information and news bulletins.

Clearly, there was a poor culture fit between the client and advisor.  The client could feel it, and she trusted her gut by calling us back to get a second opinion on the changes she made only two years prior.  We are glad she did so we can straighten out the mess the previous advisor got her into, although her son might want to think hard about whether the same investment process he uses is appropriate for everyone, especially his mother.

So how do you know if there is a good culture fit between you and a potential advisory relationship?  Here’s a list of the top ten questions that you should ask of an advisor BEFORE you move those investment accounts:

  1. What is your philosophy as an advisor? Are you focused on financial planning or investing?  During a review meeting, how much of the time is devoted to reviewing investment account statements and performance vs. a review of my financial plan?
  1. How are you paid? Do you receive commissions on products I buy, or do you charge ongoing fees, or both? The “or both” question is vital because you will find out if this is going to be a relationship where the advisor can get paid both ways.  We would argue there are too many conflicts of interest in a relationship of this kind.  Think fee-only fiduciary!
  1. What kind of work will you do for me before you move my accounts? Do you look at other areas of my life and finances besides just my investments?
  1. Is my investment account customized for me or do you use model portfolios? How much can I expect for a return on the investment? If the advisor gives you a number at this point, you might consider cutting the meeting short.
  1. Who makes the investment decisions and who executes the trades? And do you have to get my approval before buying or selling an investment product? How much trading will go on in my account?
  1. What kind of focus do you have on my tax return and limiting the amount of taxes I pay?
  1. Who does what in the office? Who will I interact with over time? Go to the office of the advisor and look around.  You will get an immediate sense of the culture.  Is it old and dated and piled high with papers or is the technology state-of-the-art.
  1. How do you protect my privacy and my accounts if something goes wrong?
  1. Do you have any securities violations and where can I check your record?
  1. How do you add value to my life? This might be the most important question you could ask!

Pay attention to the answer(s) you receive from all of these questions.  How does it feel to you in your gut?  Are you being looked at in the eye?  Can you trust the people you are interacting within the office?

Now go to the next advisor and do the same exercise.  And, maybe even a third time.  The culture will reveal itself.  Feel it.  If you trust it, you may have found a home.  For the culture of the home is determined by the people inside the home not merely by the look of the place from the outside or the computer screen in front of you.