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Is it ok to ask my financial adviser what funds they invest their personal assets in?

Jan 25, 2012 by Alan from Colorado Springs, CO in  |  Flag
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6 votes
Clark B. Hoover Level 15

Alan, your question is a fair one and I would recommend that every client ask this question of their advisor. While it is highly likely that the client's investment needs will differ from those of the advisor, here are some red flag questions I would recommend that you keep in mind:

(1) Does the advisor have investment funds in his/her account that have lower fees than those recommended to the client? For example, if client accounts have mutual funds while the advisor invests in lower-fee exchange traded funds (ETFs) for his/her own portfolio, then there may be a serious problem here.

(2) Is the risk profile of the advisor's allocation significantly higher/lower than those of clients? (Higher risk investments tend to have higher fees, so if clients have riskier portfolios than the advisor, such as more equities and less fixed income, this could be a sign of the advisor recommending an allocation to clients in order to generate higher fees.)

(3) Is the duration of time the advisor holds positions in his/her portfolio similar to clients? If the trading activity in client accounts is much higher than that for the client, this could be a sign of "churning" whereby the advisor is making trades in order to generate trading commissions. (Fee-only advisors, by the way, do not collect any of the fees generated by the investments they recommend or any of the trading commission.)

I hope this is helpful. Good luck.

Comment   |  Flag   |  Dec 27, 2012 from Beverly Hills, CA

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5 votes

I would absolutely encourage you to ask your adviser how they invest their personal assets and what specifically they're invested in. While it may not be identical to what an adviser is recommending to you, I believe they should be comfortable discussing and explaining how they're investing personally and why.

Personally, I use the exact same investments I recommend to my clients. The only aspect that may differ is the asset allocation, or the amounts invested in stocks, bonds and cash. It makes me feel comfortable to eat at a restaurant where the chef eats his or her own cooking - I think the same concept applies here.

If your adviser isn't comfortable discussing how they invest and why - and I'm not suggesting they need to divulge specific dollar figures - you might ask them why they don't want to discuss it with you. Whether their reluctance to discuss their personal portfolio with you is cause for concern will likely be a judgement call on your part, Alan.

As an aside, I find people, in general, are far too reluctant to ask their adviser important questions and challenge them on important issues. If you're going to entrust part or all of your investments or financial planning to an adviser, I think you should make sure you're comfortable and confident with every aspect of your relationship.

Good luck with it.

Comment   |  Flag   |  Jan 25, 2012 from Atlanta, GA

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5 votes

Yes, absolutely it is fair to ask and expect a clear answer. Your advisor should have no hesitate to discuss the reason and methodology behind his or her personal portfolio. Of course it may be different than what is recommended for clients, but these differences can be clearly explained by a competent advisor. If your advisor owns index funds and recommends active funds or individual stocks, demand to know why. It is your money, and your questions justify a clear and honest response.

Comment   |  Flag   |  Dec 27, 2012 from Denver, CO

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4 votes

Hello Alan,

While I believe that you should certainly ask your advisor such questions, I would not rush to conclusions based on the response you receive. Just as a doctor does not necessarily take all the medications he/she prescribes to patients, advisors may know of investments that meet your specific goals and needs but not necessarily their own. For example, if you require a conservative portfolio and your advisor invests in hedge funds, then this could simply mean that your capacities and tolerances for risk vary, which would in turn would require different investment approaches. As a result, your advisor might recommend solid investments for your portfolio but not hold those securities themselves. So when asking what your advisor is investing in, you might want to follow up with asking 'why' he/she is making these investments. This should clarify any misconceptions that may arise from simply asking whether your advisor holds the securities which they are recommending. I hope you found this helpful. If you have any additional questions, please feel free to reach out.

Best, Alex

Comment   |  Flag   |  Jan 25, 2012 from Staten Island, NY

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3 votes

Yes! We believe finding an advisor or manager who "eats his own cooking is critical."

A recent report by Morningstar illustrates this point: managers who have over $1 million invested in their own funds have an average star rating of 3.5 versus a star rating of 2.9 for those with no money invested.

2 Comments   |  Flag   |  Jan 26, 2012 from Bryn Mawr, PA
Ryan

That is a very interesting fact! Do you have a link to an article or research study that supports that number?

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Flag |  Feb 09, 2012 near San Diego, CA
Victor Guettlein, CFP®

Morningstar Advisor website

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Flag |  Feb 09, 2012 near Arvada, CO

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2 votes

While I think its a great advisor soundbite to say, "A cook should eat his own cooking," I think that statement in and of itself is flawed. A cook in a restaurant may make a great steak, but rather prefer eating fish, when its his turn to eat.

Likewise, while I dont think the advisor should be uncomfortable with the question and you shouldnt hesitate to ask if you dont know, I dont think its any validation of his recommendation efficacy simply if he tells you that its "ok" because "I'm doing it, so should you..."

Eddie Patel

1 Comment   |  Flag   |  Feb 08, 2012 from Orland Park, IL
Victor Guettlein, CFP®

But would you be comfortable buying, let's say, Mortgage tranches from Goldmint Sax if you knew your "advisor" was actively shorting them? If he doesn't have enough conviction to own them, why would I? You make a valid point, but my point, and Marty's is that we want our managers to have skin in the game. And it's fair that our clients expect us to have skin in the game.

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Flag |  Feb 09, 2012 near Arvada, CO

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2 votes
Rich Winer Level 20

Yes, I invest in all of the same investments and investment strategies that I recommend to my clients (although our allocations will differ).My clients appreciate that "I eat my own cooking" and that my personal investments are performing in line with theirs.

Comment   |  Flag   |  Apr 12, 2013 from Woodland Hills, CA

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1 vote
Ryan Level 19

You should without question ask the advisor how they invest their own funds. Some advisors with answer you very directly while others may not. It is an important part of your vetting process to understand who has skin in the game and who does not.

Comment   |  Flag   |  Feb 08, 2012 from Gettysburg, PA

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1 vote

Absolutely! If an advisor doesn't "eat his own cooking", neither should you. This is also one of the fund selection criteria we use in picking funds for portfolios; we want fund managers who eat their own cooking, too. That said, your specific goals and situation may dictate that you have a different mix than the model your advisor has his own investments in, but you should see a similar theme running through your portfolio.

1 Comment   |  Flag   |  Feb 08, 2012 from Arvada, CO
Victor Guettlein, CFP®

Alan, feel free to reach out if you have additional questions as I am just up the road from you in Denver.

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Flag |  Feb 08, 2012 near Arvada, CO

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1 vote

I see all these "Yes" answers above, but I disagree somewhat. All my portfolios are customized for the unique circumstances of the individual client. What may be appropriate for me, may not be for them. For example, a client wanting primarily income and safety will largely have different investments than mine because my profile is significantly different. I also would not usually buy tax free bonds for someone in a very low tax bracket because they can usually get a higher net return from a taxable bond; however I certainly would buy munis for myself because I am in a high tax bracket. That said, there is often some degree of overlap and where there is the funds should be the same. Also note that a share class may be different, depending on whether the account meets the minimum for a lower expense share class of a no-load fund. Or, a small UGMA account with $1,000 to invest in a fund will not usually find it worth paying a $25 fee to invest in an institutional share class like an account with $25,000 to invest would because the fee, while small, works out to 2.5% of the $1,000 compared to 0.1% of the $25,000.The main thing to remember is this: as an RIA, I have a fiduciary duty to my client to always act in their best interest. That means putting them in the best investments and lowest cost shares classes for their individual profile.

Comment   |  Flag   |  Apr 23, 2013 from Charlotte, NC

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