Jason Zweig, a personal finance columnist for The Wall Street Journal, recently published
a story
on the difficulty of finding stockbrokers, investment advisers, finanical planners, and insurance brokers who will act in your best interests — something that is becoming even more difficult with the Trump administration's dismantlement of the
Department of Labor's Fiduciary Rule.
The burden of finding someone who will act in your best interest is on you. That means asking an adviser the right questions (and listening for the best answers). I encourage you to clip or print out this column and bring it to your next meeting with your financial adviser.
Below are Zweig's 19 questions he suggests you ask a prospective financial adviser, his preferred answers in parentheses, and AlphaGlider's answers in italics:
1) Are you always a fiduciary, and will you state that in writing? (Yes.)
Yes. AlphaGlider is a Registered Investment Adviser (RIA), and as such is required by law to always act as a fiduciary for all types of investment accounts, not just retirement accounts.
Learn how an RIA is different from a broker-dealer ⇒
2) Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)
No.
3) Do you participate in any sales contests or award programs creating incentives to favor particular vendors? (No.)
No.
4) Will you itemize all your fees and expenses in writing? (Yes.)
Yes. In fact, we have already done that on the "Low Fees" page of our website. For example, a hypothetical client with $200,000 invested in AlphaGlider's Balanced Strategy (AG-B) would incur total annual fees of approximately 0.62% (62bps) of assets ($1,240 = 0.62% x $200,000) as of the date of this blog post. This is composed of a 50bps advisory fee, fund1 management fees of 9bps, and an estimated 2-3bps in trading commissions paid to our independent custodian, TD Ameritrade Institutional.
5) Are your fees negotiable? (Yes.)
No. AlphaGlider uses transparent, every day low pricing (EDLP). Our advisory fee depends on the amount you invest with AlphaGlider, not on your negotiating skills.
6) Will you consider charging by the hour or retainer instead of an annual fee based on my assets? (Yes.)
No. Hourly or retainer charges are more relevant in the delivery of financial planning services, which AlphaGlider does not offer.
7) Can you tell me about your conflicts of interest, orally and in writing? (Yes, and no adviser should deny having any conflicts.)
Yes. As with any service provider we can think of, AlphaGlider operates in a world of conflicts of interest. We have tried to minimize them to the greatest extent possible, but some still exist. When we are aware of them, we disclose them to our prospective, and current, clients. And as we state in our
client brochure (Form ADV Part 2), if a conflict of interest arises between us and our clients, we will make every effort to resolve the conflict in our clients' favor. Below are a few, but not complete set of, examples of conflicts of interest that we have identified:
As a fee-based adviser which charges its fee on a percentage of assets managed, AlphaGlider has an incentive to maximize the amount of money we manage for a particular client. For example, it may wise for a client to convert an traditional IRA into a Roth IRA, but this would reduce total assets managed by a fee-based adviser by the amount of tax due on the conversion, thereby reducing the adviser's fee.
Another example: we are incentivized to recommend that a client roll her old, but excellent 401(k) account (e.g. low fees with good investment options) into an IRA run by us.
It is important for the client to recognize that all adviser compensation structures have conflicts of interests — there's no getting around it. So ask me, or any other prospective adviser, about how we are paid, what are our conflicts of interest, and how we address them. Zwieg's 19 questions are good start.
8) Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)
No.
9) Do you pay referral fees to generate new clients? (No.)
No.
10) Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? (Here the best answer depends on your needs as a client.)
AlphaGlider focuses on tax optimized investment management. We do not offer financial planning.
11) Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)
No.
12) What is your investment philosophy?
We discuss our investment philosophy on the "Investing/Philosophy" page of our website.
13) Do you believe in technical analysis or market timing? (No.)
No. We perform fundamental analysis to identify, and size, the security positions in our strategies.
14) Do you believe you can beat the market? (No.)
No. And Yes. We believe that it is difficult to beat the market over the short-term (less than 2-3 years), and that relative gross returns for most market players are sufficiently random over the short-term. However, our goal is to outperform the market over the long-term (10+ years) using valuation techniques that have been shown to be useful, on a statistically significant basis, over the long-term. We wrote about this in a 2015 blog post entitled Long Time Horizons.
15) How often do you trade? (As seldom as possible, ideally once or twice a year at most.)
Changes to the composition of our strategies are driven by relative changes in valuation, not by time passed. For example, we may trim or completely sell a security as it approaches what we consider to be its fair value, and replace it with another security, either new to the strategy or already existing in the strategy, which is trading well below its fair value.
In practice, our long-term oriented investment style and philosophy has resulted in low portfolio turnover (i.e. trading). Over the last 12 months, we made a change to our strategies only once.
We do periodically trade our clients' portfolios to realize capital losses in a practice called
tax loss harvesting. We also continuously monitor our clients' portfolios and
rebalance2
them whenever their mix of assets strays too far from their strategy targets.
16) How do you report investment performance? (After all expenses, compared to an average of highly similar assets that includes dividends or interest income, over the short and long term.)
We report our investment performance on a
time-weighted basis, after all expenses (e.g. advisory fees, fund management fees, trading commissions). We calculate the investment performance of each of our strategies in accordance with the
Global Investment Performance Standards (GIPS). Annual disclosure presentations are available upon request for each of our strategies.
17) Which professional credentials do you have, and what are their requirements? (Among the best are CFA [Chartered Financial Analyst], CPA [Certified Public Accountant] and CFP, which all require rigorous study, continuing education and adherence to high ethical standards. Many other financial certifications are marketing tools masquerading as fancy diplomas on an adviser’s wall.)
Our Chief Investment Officer, Doug Kirkpatrick, has held the Chartered Financial Analyst® (CFA) designation since 2000. To earn the Charter, one must satisfy the following requirements:
- Have a bachelor's (or equivalent) degree, be in the final year of a bachelor's degree program, have four years of professional work experience, or have a combination of professional work and university experience that totals at least four years.
- Pass three levels of exams, each one year apart (June 2017 exam pass rates were 43% for Level I, 47% for Level II, and 54% for Level III. Candidates report dedicating in excess of 300 hours of study per level to prepare for each exam.
- Have four years of professional work experience in the investment decision-making process (accrued before, during, or after participation in the CFA Program).
- Join CFA Institute as a regular member.
18) After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? (If I told you anything over 3% to 4% annually, I’d be either naive or deceptive.)
We believe3 that a 3% to 4% real (before inflation) annual return is a reasonable estimate over the long-term for balanced to moderately aggressive portfolios.
When showing the impact of investment expenses on long-term returns in the "Low Fees" page on our website, we assume a 6% gross return (4% real return assuming 2% inflation), for all of the major investment advisors.
19) Who manages your money? (I do, and I invest in the same assets I recommend to clients.)
The vast majority of our Chief Investment Officer's investable assets are in the AlphaGlider Global Moderately Aggressive Strategy (AG-MA).