The three questions my financial advisor couldn’t handle

A woman I’ll call Lynne emailed me with the subject line “Devastated”.

Here’s what she wrote:

Scott,

Over the past three years I had become increasingly anxious about the state of my finances, which have been controlled by my ‘trusted’ financial advisor of seven years. Finally, I sent him an email last Friday asking him the three questions you suggested in your book.

He replied the following Monday, terminating forthwith his services! I am a single mother of three adult children, without a home, living alone, paying rent. During the seven years he has been my advisor, my capital assets have been reduced by over $500,000 (to $800,000). What can I do?

Lynne

Bingo Bango!

I’ll answer Lynne’s question in a moment, but first, here’s the cut-and-paste email I wrote about in my book:

Dear (advisor’s name)

I’ve decided to do a review of my finances. Could you please do the following three things for me:

  1. Print me a statement that clearly shows my annual percentage return since we began, net of fees.
  2. Benchmark my return against the relevant accumulation index for the same period.
  3. Provide me with an itemised list of fees (expressed in both dollars and percentages). Include any and all ongoing fees, commissions and administrative costs that I’m charged.

Kind regards,

Client

Lynne, you can almost picture how this went down:

Your advisor double-clicks on his email: “Oh, I got an email from Lynne, I wonder what she’s up to …”

As he starts reading, his eyes begin to squint like he’s getting a root canal.

And then he gets to the end of your email and theatrically spits out his frappuccino all over his mainframe, which ricochets and ruins his Roger David tie.

Lynne, know this: good advisors ‒ and there are many ‒ actually want their clients to ask them these questions. They can justify their fees because they’re working in their client’s best interests. A good advisor wants smart clients who understand and value good advice.

A shonky advisor, on the other hand, will do what this guy just did ‒ sack you and move on to the next chump. They see you as their meal ticket. It’s not personal. It’s just lunch.

Now, I spat out my coffee when I read that your assets had decreased by $500,000 over the past seven years (thankfully I was not wearing a tie).

Here’s why:

Aussie shares have achieved a compound annual return of 8.5% over the past seven years, while international shares returned 14.5% a year, according to Vanguard. In other words, a $10,000 investment would have grown to $17,701 (Aussie shares) or $25,801 (international shares).

Over the same period the average default super fund (with a higher weighting to cash and fixed interest) has returned 9.1% per year (industry funds) or 8.4% (higher-fee retail funds), according to ratings agency Chant West.

Someone needed to be given the boot here, Lynne, and I don’t mean you.

So now it’s time for you to write a few more emails. The first is to make a complaint to the firm. The adviser’s financial services guide will tell you how to do this (look through your paperwork and you’ll find it, otherwise call the firm and request a copy). The next is to lodge a complaint with the Australian Financial Complaints Authority (ACFA) via their website (afca.org.au/).

Look, one of the biggest fears we all have is looking dumb in front of others. And sometimes experts can use that against you ‒ whether they’re a mechanic, a doctor or a financial planner. Perhaps that’s why you didn’t act on the feeling you had in your gut about this bozo for three years. Yet the smartest people are those who fearlessly ask the simplest questions, and then back themselves.

So back yourself. Remember, no one cares more about your money more than you do.

Tread Your Own Path!