There are thousands of investment options in the current market for the average investor, and while options and choice are good – the sheer volume of funds may leave even the savviest among us bewildered.
This is when the expertise of a financial adviser comes in. Financial planning is a comprehensive process that requires hands-on experience and a strong understanding of not just investments, but also tax-, insurance- and retirement planning.
Decisions need to be made with your individual needs in mind, while also taking into consideration your income, financial position including debt and other liabilities, your existing investments if you have any and financial goals.
With all the complexities of financial planning, it is understandable that people turn to advisers - but that does not mean you should not ask questions and try to understand the investment recommendations put to you from your adviser.
Here are five questions you need to ask your adviser about their investment recommendation.
1) How did you pick this fund?
Ask your adviser about the process they went through in order to narrow down which fund/s to pick out for you.
Ask about the fund’s objectives, its past performance and what the charges breakdown are. Ask your adviser if they take into consideration external ratings, and how they gauge the risk and reward profile of a fund.
Does the chosen fund collapse in a bull market but performs well in a bear market? How has the fund fared compared to its peers and its benchmark index?
Ask about the reasoning behind selecting one fund over another – but make sure that they explain it to you in plain English. If you don’t understand what NAV is, or how the Sharpe ratio affects your money – say so.
Asking enough questions will not only involve you in the important task of taking care of your money, will also help you understand the reasoning and the research process your adviser employs for you.
2) How often is the fund reviewed?
The next logical step would be to understand how often the recommended funds are reviewed. Just because a recommendation is made, it does not mean that you are locked in to that fund forever – especially if changes to the fund mean it is no longer suitable for you.
Ask your adviser about how often your portfolio and individual funds are likely to be reviewed, and how do they go about assessing suitability if, say, the fund’s mandate changes, or the fund manager leaves. Market conditions might also change significantly and throw your asset allocation out of sync with your desired outcomes and investment time-frame.
3) Does this fund fit into my portfolio?
Every investment picked will play a distinct part in your portfolio, and as such any investment should be made as part of a holistic view. This is where a fund’s mandate will determine whether it is correct for your portfolio.
For example, a fund focused on large-caps could make up the core of your holdings, to lend some relative stability. A thematic fund or a small/mid-cap fund could help add diversity.
Ask your adviser about their view on the fund – what role will it play? What do they expect from that asset class? Why do they think this, and importantly how will it complement your other holdings? Make sure that you are not unknowingly exposed to the same asset-class or companies more than once.
The questions above should get the conversation started with your adviser. Do not feel uncomfortable in questioning your adviser’s picks, this is your money after all.