It's the deeper and more challenging questions that explore gray areas that are difficult to answer - I'm hoping to make my decision by week's end.
Here are some of the challenging questions:
- Do you want your investment advisor to be your financial planner as well? Will your investment advisor understand the optimal investments for your tax situation if they are not.
- Do you prefer a discretionary advisor or non-discretionary advisor? The former can act in your name to make trades, rebalance accounts, etc.... While the latter must obtain your permission first.
- Do you prefer to hire an individual or a firm. The individual can a finite amount of business, while the firm has economies of scale and differentiation of roles. Will you have access to the big thinkers / big advisors when you want to talk with them in a firm? Are you paying the individual to do things a specialist (trader) or less expensive person (clerical) could otherwise do?
- Asset allocation strategy - does your advisor believe in projecting asset class growth? Does the advisor utilize projections in formulating your asset allocation model? How does this effect your long term returns? How would you find out?
- Tax orientation - does your advisor plan your investments using a post-tax basis. This goes far beyond investing non-retirement assets in taxable accounts. It incorporates tax consequences for college planning / 529 accounts, post-retirement spending, etc....
- Can you retain your existing broker? Does your advisor require you to move your accounts to a new brokerage where they have custodial priveledges? Will you be able to download your investment data into quicken or ms money? Will your transaction fees increase? DFA funds, for example, permit only a few brokerages to sell their products (I think 6).
- Attention to transactional costs - will your investment advisor incorporate transactional costs into rebalancing and trading decisions?
- Fees - how does your advisor add up? Are his fees the typical 1% or more reasonable 0.25% or 0.6%? Obviously, over time fees will erode your returns. Can your advisor justify the higher fees based on larger services, increased communications, better integration of financial planning and investment planning?
- Does your advisor charge an additional fee for investment plan set-up or is it part of their ongoing fee?
- If your assets are below $1,000,000 or $800,000 or some other arbitrary number, will you face minimum account fees? Will they increase you actual assets under management fee beyond the quoted amount - for example from 0.25% to 0.5% or 0.6% to 1%? Is this acceptable to you? Will you suffer minimum account fees for an extended duration or merely a short period of time? If this is to be a long term relationship, do xx years of minimum fees matter in light of the value of the advisory relationship you are building?
In my current search I'm focussing on investment advisors with fees below 1%. Currently they have minimum fees that would increase my expense ration to somewhere between 0.5% and 1%. I guess the average passive fund (open ended mutual fund, close ended fund or ETF) they recommend will have an ER of about 0.35% - some much lower, some much more. That would put me between 0.85% and 1.35%. SWERX costs me about 1% right now, but I'm sure a good asset allocation plan can do better - including the benefit from integrating all of my investments. It will take me about 3-5 years to increase my assets to a level where the actual AUM fee would be less than the minimum. Am I willing to wait and pay the extra money? I think so.
If you have any additional challenging questions you faced in hiring and investment advisor, please post them here.