Investment Questions to Ask Your Financial Advisor

When an advisor recommends a particular investment, how do you know it’s right for you? Financial writers, myself included, say you need to ask questions. The trouble is, according to a recent survey, most investors ask the wrong questions.

The survey, funded by asset manager Dimensional Fund Advisors and conducted in March 2014 by consulting firm Advisor Impact, polled 1,229 investors. The respondents were almost evenly split among female and male. Most had an investment net worth of over $500,000 and almost half had an annual household income of over $100,000.

Pollsters asked investors, “When your advisor makes an investment recommendation for your portfolio, which, if any, of the following are important for you to know?”

For 70% of the respondents, the most important information was the risk associated with the investment. At face value, this seems to be quite logical. What investor is unconcerned with risk? Behavioral economists tell us that most of us are far more averse to a loss than an equal chance of a gain.

The issue is in understanding the definition of “risk.” To simply ask an advisor, “What risk is associated with this investment?” is like asking the butcher at Safeway to tell you about the risk associated with eating meat.

The butcher, thinking about the chance of choking on a bite and dying, might say there is almost no risk. After all, according to the National Safety Council, the odds of dying from choking on food is 1 in 3,649 – and from cars, 1 in 112. Yet the butcher’s answer doesn’t necessarily apply if the customer is thinking about the risks associated with saturated fat, mad cow disease, hormones, contamination or allergic reactions.

To answer the question fully, the butcher must ask a lot of questions and address the many potential risks associated with eating meat. The chances of that happening at a busy meat counter are highly unlikely. The consumer will probably be left with a skewed understanding, perhaps overly positive or negative, of the associated risks.

The same is true with investments. A few of the risks associated with most securities include economic, political, default, legal, interest rates, business cycle, managerial and diversification. Rarely does an investor understand the nuances of all the various components of risk. Many advisors don’t fully understand them or explain them, either.

The second most important factor, which 58% of investors wanted to know, was what return they could expect from the investment going forward. Again, the answer to this question won’t be very helpful.

There is no way the advisor can know this, unless the investment’s return is guaranteed (like a certificate of deposit or a fixed annuity). Nevertheless, no return is completely guaranteed, even those that are guaranteed. Unforeseen problems can shatter any guarantee, such as the bankruptcy of the guarantor or political interference.

The third most important thing investors wanted to know was the amount of the fees associated with the investment. But I was surprised that, although this question ranked third, less than half (47%) of the respondents thought it was important. Fees paid to advisors and middlemen are an essential consideration. They are one of the few things investors can actually control, and the fees you pay can single-handedly turn a great investment into a poor one.

Even if you’re among the minority who inquire about fees, you can’t be certain you’ll receive a straight answer. I’ve had many life insurance and annuity salespeople swear to me that their company charges “no costs whatsoever” to the customer.

To become an informed investor, then, your first step may be to learn what questions to ask. It’s also important to keep asking those questions until you get clear and satisfactory answers.

Follow AdviceIQ on Twitter at @adviceiq

Rick Kahler, CFP, is president of Kahler Financial Group in Rapid City, S.D.

AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialtInvestment Questions y, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.