By Leland B. Hevner, President of the National Association of Online Investors
I don’t have to tell you that 2008 was a disaster for individual investors. It was the worst year for stocks since 1931. And 2009 isn’t starting any better, with January experiencing the worst market drop for this month ever.
But it wasn’t the markets that dictated your returns in 2008. It was how you invested in reaction to them. According to Securities and Exchange Commission (SEC) statistics, over 50% of you sought the help of financial advisers in 2008. The return on your portfolio depended more on them than on the markets. So you need to know not only how the markets performed but also how your adviser performed in 2008. The purpose of this column is to enable you get this information in the most efficient manner by asking the right questions.
Let’s start by defining some action items. As soon as possible, set up a face-to-face meeting with your adviser and schedule 1 hour of his/her time – a phone call won’t do. Print out the list of questions below and take them to the meeting. Also take a small digital recorder (a $39 investment at most) that you will place on the table in record mode during the discussion. Tell your adviser that are using it because you need to concentrate on the discussion, not writing down everything you hear. This simple act will signal to your adviser to not attempt to either evade the questions you will be asking or to shade the truth in any area.
As a long-term teacher of personal investing, I know that people are often intimidated when speaking with their adviser. This needs to change, and your approach to this meeting is critical. Always keep in mind that the adviser works for you, and this is your meeting. You need to control it. Make it clear that you must get through 15 questions before the meeting is over, so tell your adviser to keep this in mind. Otherwise, you may be subjected to a simple sales presentation and an attempt to “run out the clock” without answering the hard questions.
You are now ready to ask the following questions in three categories.
Here, the goal is to get details on how your portfolio performed last year. It probably did badly. But if you lost only 20% while the markets were losing 40%, then maybe your adviser did a pretty good job. It’s all relative.
Whether you lost or gained money in 2008, you paid your adviser money for the privilege of working with him/her. Some of these costs you may already know about, but some may come as a surprise. In either case, let’s get them on the table (and on your digital recorder).
Don’t let your adviser skirt the cost issue by saying he/she doesn’t have the exact numbers at hand. This information has to be disclosed to you by law. If he/she doesn’t have the information right then, set a specific date for getting it and make sure you follow up. Remember, you have a recorder running and your adviser knows it, too.
It is now time to look forward to 2009. At this point you are interviewing the adviser to determine if he/she will continue to be your adviser.
These are your questions. Don’t leave without having all of them answered or a specific date when you will get the answers. I suggest that soon after the meeting you send the adviser an e-mail with the dates agreed to and the information required. Also put them on your calendar and then follow up.
Now you have the facts, and the impressions, to determine whether you want to continue with this adviser. You have just completed his/her job interview.
Red flags include the following:
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Increase in value of property due to market conditions. When you sell appreciated property, you pay tax on the appreciation since the date of purchase. When you donate appreciated property held long term, you may generally deduct the appreciated value.