Questions to ask your financial adviser; yes, it's been done before, but this list is not manufactured on the back of "another list won't hurt."
The greater mileage is in the recognition that the nature of the list has, by necessity, changed.
The things you needed to have established with your financial adviser back in the 1980s or 1990s would be a different list, with different nuances, than the modernised list manufactured for the second decade of the 21st Century.
The singular biggest issue is that the world has morphed from a highly regional world with different economic and currency blocs into a globalised world with the pace of change having a significant impact on the way investments are managed.
In simple terms, the world of passive investment advice doesn't work as well in the 21st Century as it did in that bygone 20th Century.
If this is true, investments need to be actively managed and the role of the financial adviser is therefore more significant. And, if that's true, then the questions asked of a financial adviser need to be those that help the investor to manage the relationship with the adviser.
Question 1: How does the financial adviser calculate my attitude-to-risk or tolerance to loss?
Work with an adviser who can explain this to you. So you have been asked whether you are a "cautious", "balanced" or "aggressive" investor, or something that sounds similar?
Being actually placed into a box isn't the same as the adviser understanding the risk, or, the investor's expectations being managed appropriately.
Remember Justice Putnam in his Prudent Man Rule, in which he states: "Do what you will, your capital is at risk." Investors need to know, precisely, what risk they are taking.
Good marks should go to advisers who can explain "standard deviation" to you, and top marks should go to those that can handle the "risk-free-rate"; the Sharpe ratio and the Sortino ratio.
Those that do not believe that your risk can't be conceptually and statistically analysed should be dumped into the "salesman box".
To this box add the disclaimer: "Salesmen who do not understand risk can hardly be expected to explain your investment performance to you."
Question 2: What is your benchmark?
Understanding risk becomes easier if the performance benchmark is "agreed" on between investor and adviser.
A benchmark is a target, and as Zig Zieglar says: "If you don't have a target what are you aiming at?"
Also beware the apples and oranges comparison. Selecting, say, the MSCI Global Equity Index as a benchmark, and then investing into a portfolio of Indian, Chinese and Australian equities, is the same as being asked by your mother to go shopping for apples and coming back with oranges.
It's not exactly rocket science to select assets that resemble the benchmark, so for any adviser who doesn't "get this" should be sacked.
Question 3: What is base currency?
The base currency of an investment is the currency of end use. More money has been lost on the currency casino then anywhere else in the investment world.
Things that an average adviser really must know: the difference between the underlying asset in a fund, and the denomination of the fund itself; and the need to reduce currency risk by using base currency domestic assets.
Admittedly, this is harder than it used to be. The FTSE UK equity index for example earns over 60 per cent of its income from non-sterling investments. Nevertheless, it still has more sterling equity investments than other global equity markets.
The adviser to sack? This would be the one who predicts that one currency will strengthen or weaken "for sure" over the next few years.
Given that excellent currency dealers aren't always comfortable with currency predictions to the end of the week, it should be surprising to investors that "out-of-market" advisers know "for sure" which way a long term currency trend is going!
The best way to avoid currency risk is to avoid, as much as possible, the currency game.
Question 4: PRISD and the planning process?
One of the better litmus tests of a good financial planner is: how good is the fact find? Or, how good is the adviser's process?
The whole process of looking at an investors position today; what they want in the future; their attitude to risk; their investor experience level; their current balance sheet and savings capacity, can hardly be achieved in the form of around ten questions and a cup of tea!
Amazed I was then, when undertaking some ‘Competitor Analysis' that some "financial advisers" recommend financial advice after a highly minimalistic KYC (Know Your Client) process of 10 questions. Absurd.
It's a bit like the guy who joins the gym targeting a 20kg weight loss and he assumes that paying the gym fees is 90 per cent of the challenge.
There is no short cut to financial health outside of a lottery win.
A good process should take you through PRISD. Protection issues: What happens if the bread winner dies too soon?
Retirement: What happens if the bread winner dies too late?
Investment: What have I got that will improve our wealth?
Savings: Where is my emergency money?
Debt: Do I have a roof over my head planned (mortgages), or am I burdened with paying more on debt than I earn on investments?
Question 5: Product versus advice and management
Perhaps one of the more modern questions for investors today is the one which establishes a clear line between the financial services product being sold and the advice being given on an on-going basis after the product has been sold.
The next generation of investors is best off accepting two critical pieces of information. Firstly, that investment is about three issues: the buy price, the sell price and the management in between.
This means that investors need to be clear about who is in charge of the decision making. Are the investors themselves the decision maker? Is the financial adviser the decision maker? If it is the latter, how is the adviser paid to keep an eye on the decision to actually make the sale?
Secondly, investors need to be aware of the difference between advisers following a number of client results, and fund managers looking at a specific list of assets.
All of these "talents" need to be mixed into the wash. And, if it's true that people do what they get paid to do, then it's actually in the best interests of investors to know who gets paid to do what!
It never used to be so complicated!
The writer is chairman of Mondial Financial Partners International
