Questions to ask your Money Manager

Questions to ask your Money Manager

All too frequently we come across clients who have little understanding of the financial products/instruments they hold.

Often the performance will be sub-par (being generous), generating returns far below the appropriate benchmark based on the risk being taken.

Most importantly, there is almost always a misunderstanding of the total cost of the holdings and running costs. This is not the client’s fault, it’s due, in part, to poor regulation from an investor protection viewpoint, and due to the fact that the advisor has not fully disclosed all of the facts in layman’s terms.

To help you, we’ve put together a list of questions you could ask of your IFA/Wealth manager/Private Banker (99% of the time the title doesn’t indicate what level of service you will receive) so that you can be more informed, and hopefully enable you to make some smart decisions when it comes to your personal finances.

1. Are you a Fiduciary?

This is the single most important question you can ask, although we assume in most cases, especially in Hong Kong, that this question may be met by a blank face. A fiduciary is required to act in their client’s best interest at all times, providing full transparency and disclosure of all fees and charges; compensation in any form and conflicts of interest (whether current or potential). Would you hire a doctor who is incentivised financially for prescribing a certain treatment over the one you actually need? Of course not.

Ask detailed questions such as:

Do you receive compensation (commission, incentive, bonus, retrocessions, trail income, referral fees) from anybody other than me?

What are the alternatives to your recommendation? What is the cost difference, and do you get paid the same regardless of what I choose to do?

2. Are you Independent?

If your advisor is fully independent, they have no restriction on the type of advice or product/investment platform/investment they can recommend to you – if not, they are effectively salespeople for the bank/firm they work for. This is important, as without being independent, an advisor cannot fulfil their fiduciary requirement to you.

Imagine you wanted a new car so you go along to the nearest car dealership which happens to be Porsche. The salesperson asks you several questions and determines that you need a 4×4 (as you have kids and a dog, and the 2-seater sports car wouldn’t be able to fit them all in.

He/she is likely to recommend you a Porsche Cayenne, even though a Volvo XC40 also matches your needs, is almost half the price, and would perhaps better deal with the day to day knocks the kids would subject it to.

Hats off to any car salesperson who would do so, but if the dealer were a fiduciary, they would send you down the road to the Volvo Dealership to buy the XC40, forgoing their commission to do what is in your best interest.

3. How do you manage your own finances?

This is a question rarely asked by clients (perhaps it seems too personal), but one which can give you great insights into a firm/individual’s philosophy. Why would they recommend something to clients which they are not using themselves?

In some circumstances the client and advisor will be in a different financial situation (age/family etc) but perhaps another advisor in the office may be more of a match and can offer to explain their set up.

4. How do you get paid, how much do you charge, and what are the total costs?

There is not yet a regulatory requirement in Hong Kong for advisors to fully disclose the costs and commissions, so you should ask your advisor to disclose these in writing which you can refer to, if needed, at a later date.

Some firms will be commission-based: You are sold a product and the product provider pays the advisor an upfront fee only along with an ongoing, annual renewal commission. If investment-linked, the advisor may also receive “trail” commission from the funds (typically 0.5% – 0.75%). There will usually be a minimum time period or term throughout which you must remain invested, in order to fully withdraw your money, “penalty-free”. This structure is typical of insurance-based products sold by IFAs and retail banks and are unsuitable for most clients’ needs. Steer clear of anything which would penalise you for withdrawing your money after 1 day. Any early withdrawal penalties are simply fees payable in all circumstances.

Others may be “Fee-based” or charge you something directly. Perhaps a small management fee of 0.25 – 0.75% per annum, commissions on transactions (1%-5% for buying/selling funds) and then trail commissions from investments as above. This is typical of a Private Bank and some IFAs, and even under this model, your ongoing costs canbe in excess of 3% per year.

The differences here highlight the reason and importance of understanding the total cost of the recommendation. If this question takes more than 20 seconds to explain in a way you understand, this should raise alarm bells. Never commit to anything if there is a “lock-in” period or if you do not fully understand the costs.

5. Which SFC licences do you/your firm hold?

Without an SFC licence, a firm/advisor can only recommend the insurance-based products outlined above. Although a loophole does allow them to advise you on the underlying investments, you have no regulatory backing if something goes wrong. If you have anything with an investment element, you should be taking advice from an individual with a Type 4 or Type 9 licence which you can check on the Hong Kong SFC Register.

A Type 1 licence would also permit the individual to give you advice, but this is often a giveaway that they are taking a commission/brokerage fee for doing so.

6. What is your investment philosophy?

Your advisor should be able to explain their investment strategy to you in language you can understand.

Another good question to ask would be, what is a reasonable, net-of-fees return can I expect from my portfolio over the long term? Remember, nothing is guaranteed, be very cautious if anyone promises returns of 10% or more (depending on your risk appetite, 4-7% would be most common).

7. What other services can you provide to me? What am I paying for?

Your advisor should be able to add value to your situation. Do they only offer investment advice, or can they also provide access to other professional services (Solicitors for Wills, Accountants, Mortgage providers etc.)? Would you benefit from cash-flow planning? Do you have an inheritance tax problem?

Most clients will benefit from thorough fact-finding/discovery process, resulting in the formation of a well thought out, long-term financial plan.