Talking to clients: Four questions they should ask

(July 2007) Do you have a lot of one-way discussions with your clients? Smart investors should ask questions, regardless of whether or not they are particularly knowledgeable about the markets. Some, though, might require a little bit of encouragement. Use this template letter to let your clients know that you value their patronage and that you welcome their questions.

Dear [Client’s name],

With all of the information available online and in the media today about how to choose and evaluate financial advisors, I wanted to take this opportunity to thank you for choosing me to manage your financial affairs.

One thing that isn’t often discussed, however, is the need for clients to ask good questions about the process, about investing and about specific recommendations.

Whether you’re meeting with me or another advisor, there are four questions we should be able to answer to your satisfaction, every time, if you ask.

1. How does this investment generate returns? It is important for you to understand how investments generate a return before you buy. Whether you’re investing in a stock, a bond or a mutual fund, ask about the product’s mechanics and how the investment should generate returns.

2. How does this fit into my financial plan? How will this help me reach my financial goals? Whether your goal is to save a down payment or generate sufficient long-term returns to fund your retirement plan, feel free to ask me how we came to choose our recommendations and why they are appropriate to your situation. Some factors we consider include your risk tolerance, product returns, your time frame and the other products you already hold in your portfolio.

3. What is the risk? Constructing properly balanced portfolios is one of the most important services I provide for my clients. If you don’t clearly understand how a specific investment fits into your overall portfolio, please feel free to ask! It is important that you understand how risky your investments are, how long we plan to hold them, and the returns we expect to generate from them.

4. What about fees? Almost all investment products have fees attached to them in some way. Mutual fund companies use these fees to pay commissions to advisors for the related service they provide and to pay the managers who choose the underlying assets.

Many investments are still good holdings, even after all of the associated fees are taken into consideration. A good advisor, myself or another, will be able to discuss the fees, how they break down, and explain why your holdings are appropriate.

Making sure you understand our specific recommendations, general advice and how it all fits into your overall plan is very important to me. If you would like to discuss this further, please feel free to contact my office and make an appointment. I would be very happy to hear from you.

Sincerely,

[Your signature] [Your name]

(07/20/07)

With files from the Investor Education Fund