9 Questions to Ask Your Financial Advisor About Your Portfolio
Information is an investor's biggest ally.
If we were to give you just one piece of financial advice, it would be this - "Ask Questions."
With inflation at its highest in 40 years, uncertainty clouding the global markets, and a high volatility index - it's high time you review your financial plans to secure your future.
Just like you visit your GP for an annual health screening, you need to check in with your financial adviser at least once a year to refine and optimise your investment goals and portfolio to match your life stage and changing needs.
We have encountered many expats who could have avoided making the wrong decisions if they had asked the right financial planning questions.
It doesn't matter whether you are new to financial planning or have been investing for several years; it's never too late or too early to start asking questions about your portfolio. Remember, there are no wrong or dumb questions. After all, it's your hard-earned money that you're investing. So, don't feel intimidated or shy to ask questions to your financial adviser about your portfolio.
An informed client is an asset and not a liability.
The best financial advisers welcome and encourage their clients to ask questions, no matter how basic.
Hereunder, we share a list of questions to ask your financial adviser about your portfolio.
1. What returns do I need to ensure my money will last in retirement?
Everyone has varying income needs in retirement. While some prefer taking it easy after decades of hustling, others view retirement as a golden opportunity to give wings to their encore careers. Retirement planning takes time and research and needs to be reviewed periodically to keep up with changing market conditions and lifestyle requirements.
Checking the performance and returns of your retirement plans with your adviser can help you identify its weak points and make the necessary changes to keep them solid and steady over the years. Factors like age, when and where you wish to retire, and what you want to do in your golden years determine your " perfect retirement number."
To know whether you're on track to reach your retirement goals, you can ask your financial adviser to provide you with a report of three things:
- The overall money you have saved in your retirement and non-retirement accounts
- How long will that money last you in retirement, factoring in pensions, annuities, social security, taxes, healthcare, and other sources of income, if any
- If there is a shortfall or surplus based on your current investments and return projections
This can help you get a clear picture of your current standing regarding retirement so that you can ramp up contributions or make changes to your investment portfolios in case of a shortfall.
Finally, once you know the return you need to target for your money to last based upon your lifestyle, you can adjust your portfolio accordingly to help improve the likelihood of accomplishing that return long-term. Ultimately, this may help you to avoid taking on more risk than necessary to accomplish the goals that are important to you.
2. How much should I allocate toward stocks and bonds?
When investing your money, one of the first (and crucial) decisions you will make is deciding how to divide your portfolio between bonds and stocks. Like with other investment decisions, there is no single answer that suits all investors. The right mix depends on age, experience level, risk appetite, investment philosophy, and the target return you are pursuing on your money.
Your financial adviser analyses all these factors to identify the right proportion of stocks and bonds to include in your portfolio.
For instance, the adviser might suggest an ultra-aggressive or moderately-aggressive allocation strategy if you are a young earner with a long-term investment plan. On the contrary, as you approach retirement, your goal changes from growing returns to building a steady income. In this phase of life, the adviser might suggest you allocate a bigger portion of your wealth to bonds that may help you preserve your capital and a smaller percentage to stocks to allow some room for growth.
And don't be fooled by what you read in the media, bonds still play a major role in maintaining preservation for your portfolio!
3. How much should I allocate toward European and international stocks?
Investing in international stocks through mutual funds or exchange-traded funds is an excellent way to diversify your portfolio. The biggest advantage of investing in global markets outside Europe is that these markets do not rise and fall simultaneously as domestic markets, potentially helping you soften the blow if and when the domestic markets take a hit.
This brings us to the pressing question - how much of your funds should you allocate to foreign investments?
The answer may depend on the length of your investment horizon, risk profile, and your comfort with investing in non European companies in the first place. Asking this question to your financial adviser helps you evaluate if your portfolio has an evenly balanced exposure to international investments across the U.S., Asia and emerging markets.
4. Am I taking on too much risk?
Your risk appetite depends on age, life stage, and investment goals. The more you are willing to take risks, the higher your potential returns (and losses). Take the help of your financial adviser to identify how much risk you can handle and build an optimised portfolio that matches your risk appetite.
One tool that can help you analyse your appetite for risk is a risk assessment questionnaire. Any financial adviser who has experience with portfolio management should also have access to this type of questionnaire.
5. Should I follow an active or passive management approach?
Active investing requires you to take a more hands-on approach to your investments, watching the market and trying strategies to beat average returns by taking advantage of short-term price fluctuations. That said, active investing is not suitable for all - as it requires you to dedicate more time to monitor your investments.
The truth is, Expat Wealth At Work is not a big fan of active investing because there is not much evidence to support it long-term.
Passive investing, on the other hand, is about letting markets work for you long-term. Passive investors generally don't believe that stock markets can be timed or that it's possible to accurately select winning stocks consistently. Instead, passive investing focuses on what you can control such as diversification, keeping costs low, and tax efficiency. This method limits the amount of buying and selling happening in your portfolio, making it incredibly cost-effective and potentially more profitable in the long run.
This, arguably, more disciplined and hands-off approach may allow you and your your financial adviser to better handle the big questions around retirement, taxes, and getting the most out of life with your existing resources.
6. How much am I paying to manage my investments?
You need to ensure that the adviser's fees are feasible so that it's not eating into your returns. Financial advisers are compensated in one of the 2 following ways: performance fee-only and commissions. Performance fee-only advisers are becoming increasingly popular as they are more transparent, charge no hidden fees, and have no or reduced conflicts of interest to sell or push a particular investment product or company to earn commissions.
Don't feel uncomfortable discussing the fees with your adviser. Most advisers expect clients to ask this question, and they would be able to give you an answer easily so that you can decide if you can afford their services.
7. How much can I withdraw from my portfolio in retirement on an annual basis?
You have worked hard for years to save for a comfortable retirement. Now, it's time to reap the benefits of your hard work and diligence. If you spend too much early on, you risk being left with nothing in your later years. On the other hand, spending too little could leave you with no room to enjoy your retirement as you planned.
That said, the golden standard of retirement income - the 4% withdrawal strategy might not work for everyone. Ask your financial adviser to create a customised withdrawal strategy that helps you enjoy your golden years in comfort without worrying about running out of money.
8. How can I reduce capital gains taxes on my portfolio?
It's easy to get so caught up in maximising your investment returns that you forget the tax consequences - especially the capital gains tax.
Remember that any profits you make on your investments reach you only after tax deductions. Figuring out the right tax strategy is crucial to getting the maximum out of your assets.
Work with your financial adviser to reduce capital gains taxes by using tax-advantaged retirement accounts, investing for the long-term to reduce realising gains unnecessarily, and offsetting capital gains with capital losses.
The best financial advisers should be able to speak to you confidently on how to reduce capital gains taxes on your portfolio.
9. How much can my portfolio potentially fall during a bad stock market?
All investors live with the risk of a bad stock market. It has happened before, and it will happen again. Asking this question helps you evaluate if the amount of risk you are taking is commensurate with what you can sleep with when markets get volatile.
After all, we all want great returns but if you can't tolerate the ride, you'll likely jump off the wagon before you reach your destination. Be sure that your financial advisor frames the answer both in euro terms and percentages.
Because a € 100,000 loss can seem a lot different than a 10% loss. It's all a matter of semantics and it's a good exercise to walk through to make sure you are prepared for future volatility within your portfolio.
Preparation and diversification are the two key weapons that help you weather a bad economic hurricane. Check if your financial adviser has a contingency plan to protect your portfolio from these major events.
Be a Smart & Informed Investor
Building the right portfolio starts with asking the right questions to your financial adviser. When it comes to growing and protecting your wealth and assets, there is no "one-size-fits-all" approach. The key is finding trusted financial advisers who can pinpoint your blind spots and help create a tailored financial strategy that works best for you. The best financial advisors will send you a follow up email after your meeting outlining the conversation to help save you time. Holding regular and consistent dialogues about your portfolio with the adviser helps spot issues early and take proactive measures to minimise negative impacts.
When it comes to long-term planning for retirement, the earlier you spot and eliminate problems, the greater the potential for a safer and bigger retirement nest egg.
Expat Wealth At Work is a fiduciary performance fee-only adviser and specialised in retirement planning and portfolio management leading up to and through retirement. We can help you maximise your wealth to ensure you retire on your terms, paying as little taxes as possible.
Need help getting started with your retirement planning? Contact us today for a no obligation conversation: firstname.lastname@example.org