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5 questions to ask your financial advisor each year

As an investor seeking a financial advisor, you probably held multiple meetings prior to making your selection. You may have even searched the Internet for the best questions to ask a potential advisor. And ultimately, you made your choice. But now what?

You have trusted your hard-earned assets and retirement hopes to an advisor, and now you talk quarterly or annually about the price of oil, global currencies and interest rates. Perhaps you leave feeling confident in the advisor's intellect and firm capabilities, but what about your financial future and your retirement goals?

Businessman questions perplexed
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Send these five questions to your advisor ahead of time and you will leave with what really matters: satisfaction with your progress or an action plan to make changes.

1. What is my all-in cost? Whether your advisor charges a flat fee, a percentage of assets or commission, the most important thing to understand is your all-in cost each year. In addition to advisory costs, you will be paying additional expenses. Here are a few examples of typical costs investors incur:

  • advisor cost
  • mutual fund or ETF expense ratios
  • trading costs
  • account maintenance fees

2. What is my performance, net of fees, relative to my blended benchmark? At the beginning of the year, if you told your advisor you are a conservative investor with the primary goal of capital preservation and then wonder why you didn't keep pace with the S&P 500 Index, you have unrealistic expectations.

Your personal benchmark depends on how your funds are allocated. For example, a portfolio with 60 percent large-cap U.S. stocks, 20 percent short-duration U.S. bonds and 20 percent emerging international stocks would need to be measured against the corresponding index for each of those categories. Your benchmark for measuring advisor performance is a blend in that case, not the S&P 500.

3. Am I on track or behind to hit my retirement goal? According to the Employee Benefit Research Institute, many individuals retiring at age 65 and living until 100 would be at massive risk of running out of money.

"Eighty-three percent of the lowest-income quartile households would run short of money, and almost half (47 percent) of those in the second-income quartile would face a similar situation," the institute concluded.

First of all, you need a financial plan so you can determine a realistic goal and avoid running out of money in retirement. Going forward, you need to make your advisor aware of any major changes in your situation, but — with the plan in place — you are able to measure your personal progress.

To know whether you're on track or behind to reach your retirement goal, request a report that shows three things:

  • How much money you have saved in retirement and non-retirement accounts currently.
  • How long that money would last you in retirement, factoring in Social Security, taxes and other sources of income, such as pension, annuities, rental property, etc.
  • If there is a surplus or shortfall based on your current savings rate and return projections.

If you're currently retired, you should focus on maintaining a budget, given you won't be able to ramp up contributions in case the report demonstrates a shortfall.

4. What is my net worth? The average net worth for U.S.-based heads of household ages 55 to 64 was about $795,000 in 2013, according to Federal Reserve data. The median, however, was $165,700. This information demonstrates that investors need to have a greater focus on their overall net worth, to say the least.

Your net worth can be calculated simply by taking your assets and subtracting your liabilities. If you have multiple advisors or have hired one to manage an account with discussing your entire financial picture, I would encourage you to work with them to calculate your net worth.

The risk and investment decisions may not be suitable for you if they aren't aware of that information. Your net worth is your personal stock price and best indicator of a successful future retirement for most. Do you know your net worth?

5. Are any changes necessary? Why or why not? It is important to remain disciplined and stay the course if your plan is working. Not changing anything is a decision in itself and may be the best option for you, depending on your circumstances.

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Or the best move could be to ramp up your contributions, to invest more outside of retirement accounts or to start a philanthropic account if you're ahead of schedule. Regardless, get an answer in plain English that you understand.

Hopefully, these five questions will guide you toward a more successful outcome at your next annual review. Is there anything else you would add? Please let us know in the comments below.


— By Evan Kirkpatrick, founder and CEO of Wendell Charles Financial