Today my parents are going to meet with their financial adviser.  A year or so ago I suggested they work with their bank to consolidate their money.  As my parents approach retirement age the importance of organized finances increases.  My mother asked me to jot down a few things she should discuss with their adviser.

Fees
With any financial adviser the essential discussion topic is fees.  Obviously he makes his money as a % of assets, but no where in their statements does it mention how much they are being charged.  I’ve spoken before how fees have become a vital component to bank revenue, and they’ll do whatever is necessary to protect those fees.  In this case, the bank makes it extremely difficult to figure out what my parents pay each quarter.  I’m recommending my parents request a statement of fees they have been paying to the bank for investment management.  They will also include in this request an official statement of how much the advisor gets in his pocket and how much goes to the bank.  I do not expect lofty amounts, but if that is the case we might look elsewhere for service.

Liquidity
On the topic of looking elsewhere for service, my parents want to know how liquid their assets are.  In other words, if they decide to close the account today, how quickly will that money be back in their pocket?  How will they receive these funds and are there any fees to close the account?  There are tax implications as well, my parents would want a statement of earnings to take to their CPA.  The IRS gets a cut of money you make so the bank should provide a statement of income allowing my parents to pay the proper taxes, were they to decide to cash out.

Performance
We eagerly await those quarterly statements to see how much money our money has made us.  The trouble is my parents can’t tell.  Their adviser is an active portfolio manager and my parents’ funds are being shuffled around constantly.  It makes it very hard to track how well the adviser is actually doing.  My parents should ask for a simplified statement of performance.  If this guy is not actively producing greater returns than an index fund he’s out.  Plain and simple.  My parents are not paying this guy to shuffle funds for the game of it, he needs to keep their performance solid and within their risk tolerance.  I personally do not believe this guy is capable of beating the market while managing their risk tolerance.  He might surprise my parents though, and its better to have this guy managing their money than just putting it in a CD; the likely destination with my conservative parents.

Contributions
Most of you reading are probably investing regularly and not at the point where you just have a lump sum of money you don’t know what to do with.  But some day you might.  My parents opened this investment account with a simple one time deposit.  But since then they’ve paid off their house and are completely debt free (Dave Ramsey is smiling).  Not being the type to upgrade their lifestyle, my parents do have extra cash each month since they don’t have any payments to make.  They are interested in investing more on a regular basis.  Their FA will be able to direct them to whatever method their bank uses to make contributions.  

Withdrawals
What’s the point in having money if you can’t use it?  My parents have been blessed with a wonderful son, and I think they have another one somewhere.  Those kids surely deserve a yearly trip to Europe on the parents’ tab for being so great.  Sadly my greedy parents will probably just spend the money on themselves.  But how do they get that money?  I honestly don’t know the answer to that question and neither do my parents.  Their financial adviser knows and my parents need to know how to get to it and how to keep track of any taxes they’ll pay on withdrawals.

Diversification        
I keep my portfolio very simple so as to keep track of my diversification.  But I counted the funds my parents are invested in with this adviser and the total was somewhere around 17.  That’s just too many.  A pie chart of their holdings would look more like a multi spoke wheel rather than an actual pie.  And just because they’re in a truck-load of funds doesn’t make them diversified.  The financial adviser should be able to create a simple pictorial illustration of where their funds are allocated, something noticeable absent from those quarterly reports.  I can have mine drawn on a napkin in 30 seconds, he should be able to do theirs in a couple of minutes.  I doubt he can since he’s too busy shuffling around the funds.

My problems with their financial adviser mostly stems from transparency.  The quarterly reports are too detailed for my parents and I don’t have time to pick it all apart and analyze each fund to make it easier.  I’m going to suggest this advisor consolidate these funds and move my parents to a more passive strategy, unless he can prove he’s done better than the market.  The adviser also needs to be more up front about fees, as a trusting relationship is imperative to preserving my parents’ capital.  I think the adviser will be happy to oblige but my parents must tell him what they want.  I’ll let you know what we find in the coming weeks.

categories: banking, investing, personal, personal finance