There are seemingly endless books and websites that advocate interviewing a financial adviser before (and perhaps periodically after) establishing a business relationship. These sources often include lists of questions to ask; some lists are brief and general (5 questions or less), while others can be downright onerous with 25 – 40 or more questions that drill into the nits and nats of such regulatory disclosures as referral fees, 12b-1 fees, trailing commissions, etc. (Don’t get me wrong; this can be important information — but only if you know what you are going to do with the answers.)
The list I prefer (and the one I would use if I were hiring an adviser) can be found in “The AARP Retirement Survival Guide” by Julie Jason. This is a highly-readable and straightforward book that I recommend for anyone; in fact, after reading it you may determine that you can be your own adviser and don’t need to pay someone to do it for you.
But for those of you that haven’t the time or inclination to be your own adviser, Julie’s list of interview questions is reproduced here (with an additional question taken from Kiplinger that I also believe to be important).
Before delving into the questions, however, there is one request you should always make up front that can potentially save a lot of time. Submit your list of questions to adviser candidates in writing, and insist that they respond in writing as well. Eliminate from further consideration any adviser that refuses to go on record with his/her answers, no matter how polished the responses.
Why? Quite simply, it comes down to the adviser’s potential role as a fiduciary. Briefly, a fiduciary is required to put your interests ahead of his/her own. This type of relationship is obviously desirable, but it can also be difficult to determine the extent to which it is being practiced (I elaborate further on this in Question #4 below).
Because it is to your benefit that the adviser provide you with written answers to your questions (as a means to document and thus avoid any future misunderstandings about what actually are your best interests), I submit that a refusal to provide answers in writing suggests that the prospective adviser doesn’t take his/her fiduciary duties seriously.
So with that as a backdrop, below are some good questions to ask, along with my written responses (I could hardly do otherwise).
Whether or not you consider this to be a “real” interview, by the time you get to the end you will have some answers to compare and contrast with those you get from the adviser(s) you are actually considering.
1. Tell me about your background and education.
I graduated from Purdue University in 1977 with a Bachelor of Science degree in chemical engineering. For the next 30 years I worked in the oil refining and petrochemical industry in various technical, sales, product/marketing management, market research, and new business development functions.
During those years I was highly focused on doing the jobs for which I was paid. I gave little attention to my investments other than to make sure I maximized my before-tax contributions to company 401(k) plans. As for investment selections, I was one of those people that go down the hall in search of a colleague that ‘knew’ about investing to see what he or she would recommend from the various fund choices.
Over time, as I changed employers, the various 401(k) accounts got rolled over into a traditional IRA account. This was typically held at whatever large brokerage firm my financial adviser happened to be working for at the time (during our relationship, my adviser worked for 3 different firms — always telling me with each change that the next firm was better positioned to service my needs. Only later did I learn about the huge financial incentives these firms offered in order to get the adviser’s “book” of client accounts).
I was also intimidated by my adviser, never really fully understanding many of the investment opportunities that were presented to me. Consequently (and being conservative by nature), I declined most of them — and experienced rather low portfolio growth as a result.
By early 2007 I felt that I had accomplished about all I could in the chemical industry and I began to focus more attention on how well (or poorly) I was financially positioned for retirement… At age 52, the window of opportunity for any “mid-course corrections” (should they be needed) was beginning to close.
This newly-acquired interest in my investments led to an opportunity for me to be accepted in a major brokerage firm’s training program to become a financial advisor. I considered this an excellent opportunity for me to both a) learn how to optimize my own retirement portfolio, and b) help others to do the same on the basis of what I would learn and, more importantly, implement in my own portfolio.
In late 2008 the firm I was working for was taken over by another company, and by December of that year my position was eliminated. Not having expected this, I was unprepared for the termination and had to quickly find another firm in order to maintain my registrations and continue to serve my clients.
In January of 2009 I joined another financial services firm, but I soon realized that their cost structure was not conducive to executing the investment strategy I was utilizing in both my own and my clients’ portfolios.
Consequently, after more thorough research and investigation into the types of business arrangements that would best allow me to pursue my investment approach, I formed my own Registered Investment Advisory (RIA) firm in July, 2009.
2. Tell me about your licenses and registrations.
My firm (Johnson Harper LLC) is a Registered Investment Adviser (RIA) with the State of New Jersey. The firm’s IARD# is 150797.
I (Alan Johnson) am an Investment Advisory Representative (IAR) at Johnson Harper LLC. My CRD# is 5317600.
It’s important to understand, however, that licenses and registrations do not imply a certain level of skill or training.
In my view, therefore, this question is of limited value… Certainly you want to get this question out of the way fairly quickly. If the adviser you are considering is not properly registered and regulated, you should be wary of proceeding further with the relationship.
3. Will you provide me with disclosure documents that describe your services or paperwork that you will want me to sign?
Absolutely. There are three primary documents that define my business relationship with my clients. They are a) the form ADV for Johnson Harper LLC that describes the firm’s services and is required by regulatory agencies, b) the agreement that each of us must sign that defines the extent of these services, the fees involved, and the responsibilities each party has in the business relationship, and c) a questionnaire that documents the client’s objectives, tolerance for risk, and extent to which our mutual objectives and risk tolerance are aligned.
4. How would you describe your ideal client?
Let me answer this by first discussing my views on fiduciary relationships. As an RIA, Johnson Harper LLC has a fiduciary obligation to its clients. The Institute for the Fiduciary Standard lists on its web page six key duties that “embody the fundamental elements of an investment fiduciary’s responsibility.” These are:
- Serve the client’s best interest
- Act in utmost good faith
- Act prudently – with the care, skill and judgment of a professional
- Avoid conflicts of interest
- Disclose all material facts
- Control investment expenses
While these duties are clear in principle, the actual implementation can be problematic. For example, how specifically does a fiduciary “serve the client’s best interest?” What is in the client’s best interest, anyway? Is it their view based (presumably) on limited knowledge of the capital markets? Or is it the fiduciary’s view based on his/her (again, presumably) more extensive knowledge of the capital markets and various investment offerings? For example, is it really in the client’s best interest for a fiduciary to put them in low-yielding fixed income investments that likely will not keep pace with inflation just because the client stated he/she is risk averse? What is the greater risk? Erosion of purchasing power or higher portfolio volatility? And what if the fiduciary holds no such investments in his/her own portfolio? Under such circumstances, why would the fixed income investment be in the client’s best interest but not in the best interest of the fiduciary?
We believe that the fiduciary obligation is best met when the interests of the client are highly aligned with those of Johnson Harper LLC. We put our clients’ capital to work in the same investments that we hold ourselves. This simple approach satisfies all six of the duties spelled out above. Quite simply, we believe that we are acting in your best interest by acting in our own best interest.
Getting back to the question at hand, the ideal client for Johnson Harper LLC is one whose interests are aligned with ours. Our interest, quite simply, is to attempt to achieve a targeted return at a targeted level of risk (e.g. portfolio volatility).
These risk and return targets are communicated in advance with each client, and they form the basis by which our performance is measured and evaluated on an on-going basis.
5. How do you find new clients?
Looking across the Johnson Harper LLC client base, practically all of them became clients on the basis of a pre-existing relationship. The relationship may be personal or, in an increasing number of cases, one that developed over time and as a result of various informational and educational materials we have made available to them.
In a few cases we have obtained clients via referrals, but I prefer to take on new clients only after fully discussing and disclosing the nature of the investment approach utilized by my firm.
I believe that such disclosure is the only way that both parties can be sure their interests are properly aligned.
6. Tell me what you see as my objectives, experience, risk tolerance, and financial circumstances?
The premise behind the Johnson Harper LLC investment process is that all clients are interested in a reasonable, and consistent, return from their investment portfolio. Our objective is to attempt to achieve long-term market average returns with minimal volatility (fluctuation) in each client’s portfolio.
I see each potential client’s objectives to be the same as ours (market average returns with minimal volatility). I also assume that your investment experience is either limited or has been disappointing (otherwise you wouldn’t be considering our firm), your risk tolerance is low, and your financial circumstances are such that capital preservation is of paramount importance.
7. Tell me about your experience with clients who are in circumstances similar to mine.
To the extent that your circumstances, my circumstances, and my clients’ circumstances are all similar, then the answer to this question is encapsulated in the overall performance of Johnson Harper LLC.
Each day we post our overnight investment performance via a number of social media websites. We invite you to follow us on either Twitter.com (@AlanJohnson_) or SeekingAlpha.com (Alan Johnson) to view this performance history and to receive these ongoing updates.
Should our performance be of interest to you, we can speak in more detail at your leisure about the underlying processes that drive our results.
8. How do you assess your performance for these clients?
Because our focus is on investment management (see also Question #10), our performance assessments are highly quantifiable; either we are on track to achieve annual performance targets (return and volatility) or we are not.
Client aggregate holdings are monitored on a daily basis (see also Question #11) to determine if the two primary control parameters (‘theta’ for return and ‘beta’ for volatility) are within target ranges.
Should either or both of these parameters stray outside of their target ranges, adjustments are made to the portfolio to bring the parameter(s) back within acceptable ranges.
Periodically (generally on a quarterly basis) we review our performance relative to targets with each of our clients. If the client’s portfolio performance is meeting or exceeding targets, there is generally little to discuss. During a period of underperformance, however, we discuss the reasons for the underperformance and the corrective actions we will be taking to try to improve the performance. If the client is satisfied with the plan forward, we continue the relationship. Should the client be dissatisfied with the plan forward, we discuss alternatives including the possible termination of our management agreement and transfer of the client’s account to another management or brokerage firm.
9. How would you propose to meet my objectives?
Our investment management approach utilizes options, which we recognize are unfamiliar to most investors. These options are selected to both a) mitigate portfolio volatility (fluctuations), and b) generate monthly income.
Prior to entering into a management agreement we provide detailed explanations of options and how they are utilized to achieve these dual objectives. We also provide prospects and new clients with a copy of “Characteristics and Risks of Standardized Options” as required by regulatory authorities.
Briefly, Johnson Harper LLC allocates clients’ investment assets among exchange traded funds (ETFs), and standardized options on these funds. This generally involves 1) holding shares in an underlying ETF during periods when we determine that the ETF share price is undervalued by the market and likely to appreciate, 2) simultaneously holding a long put option expiring 6 – 18 months hence as downside protection against significant price declines in the ETF, and 3) generating income each month via the initiation of option credit spreads at striking prices we believe will be out-of-the-money (OTM) upon expiration (generally 30-90 days after initiation of the spreads).
Our strategy strives to achieve a total return (which includes equity appreciation, dividends, interest, and income from options) in individual client accounts commensurate with long-term equity market returns, but with significantly lower volatility.
10. What should I expect if I become a client?
A Registered Investment Advisory firm typically provides one or more of the following services:
- Money / investment management
- Financial planning
- Wealth management
Johnson Harper LLC primarily focuses on money / investment management. On at least an annual basis, we communicate to clients our return and volatility targets for the coming year.
Throughout the year we also communicate, either by email, telephone, or direct face-to-face meetings, the degree to which these targets are being met and any corrective actions we will be taking (if necessary).
In short, as your investment manager we are accountable to you for our management performance. Our performance targets, therefore, must be realistic — if our targets are too ambitious, then we will underperform and potentially lose clients.
You can also expect to have ongoing direct access to us, including answers to your questions regarding our investment processes and current thinking on managing the risks inherent with investing in the capital markets. We believe this is a distinct advantage that our clients should fully utilize; very few investors have direct, unlimited access to the specific individuals (e.g., fund managers) that actually make investment buy and sell decisions on their behalf.
11. How do you monitor investments to make sure you are meeting the client’s income objectives?
While we welcome the opportunity to passionately discuss our process to whatever level of detail the client or prospective client wishes, the answer to this question quite frankly introduces a level of complexity beyond the interest level of most investors.
But here goes anyway…
As indicated in the answer to Question #9, options can be used to both a) mitigate portfolio volatility, and b) generate income. Option valuation models can be used to estimate a parameter known as ‘theta’ which describes the rate by which an option’s value changes over time. Theta is the primary means by which portfolio income is generated.
It is one of two control parameters (the other being ‘beta’) in our investment process. We monitor these control parameters on a daily basis to keep them within target ranges; if the parameter deviates sufficiently throughout the day, then option positions are adjusted to get the parameter(s) back within acceptable ranges.
Over the course of, typically, 1-2 months the effect of keeping theta within appropriate control limits will result in the generation of net realized income for the portfolio.
12. What types of reports can I expect to receive from you? I’d like to see some samples.
We offer a variety of reports based on client interest level.
At a minimum, the brokerage firm that will have custody of your investment assets sends performance statements to you each quarter via regular mail.
We provide monthly statements on your behalf from the brokerage firm as well. These statements are either provided to you by email (with account number redacted) or made available for you to access via a secure website. Our monthly emails include commentary about the performance that month, the extent to which targets have been achieved, and our near-term outlook on future performance.
We also provide consolidated return information across all client holdings on a daily basis through a number of social media websites (such as Twitter, LinkedIn, Facebook, etc). Through these daily postings, clients can get a sense of how their own portfolio is performing relative to the aggregate performance of all Johnson Harper LLC clients.
Clients can also access their accounts directly at the brokerage firm at any time to receive both standardized and customizable reports. They can also add or remove funds from their account.
We would be pleased to provide you with samples of any of these reports.
13. What happens when there is a problem?
This is a very general question and, thus, can only be answered in general terms. The first step in problem resolution is to talk through the nature of the problem. Only by doing this can an appropriate solution be found.
Any problems we have encountered with clients to date have all been related to the issue of underperformance relative to expectations. We talk through the reasons for the underperformance, and the corrective actions that will be taken (see also Question #8).
Because my own portfolio holds the same investments as my clients, I also experience the effects of any underperformance as well. Consequently, we are both highly motivated to develop and implement appropriate corrective action(s).
In many cases a discussion of root causes and corrective action suffices; in some cases (see my response to Question #17 below) clients have decided to pursue other investment alternatives. In such cases the desire to close an account must be considered “in the client’s best interest,” and we work diligently to see that this is done as quickly and with as little inconvenience to the client as possible.
Should a “problem” escalate to a “dispute” (which has not yet happened), there are resolution procedures defined in the agreement between the client and Johnson Harper LLC. These procedures are discussed in advance with a prospective client prior to the execution of the agreement.
14. How do you get paid?
Johnson Harper LLC is paid based on a percentage of the assets you have under our management. Typically, the annual fee is 1% and is paid quarterly, in arrears, based upon the market value of the assets on the last day of the previous quarter as valued by the custodian.
For example, let’s say you open an account on December 31 in the amount of $10,000. On or after April 1 of the following year, your account will be debited in the amount of $25, which represents 0.25% (1% annual fee paid over four quarters) of the balance as of the last day of the previous quarter (December 31).
15. Do you pay a referral fee to anyone — in particular, the person who told me about you?
No, Johnson Harper LLC does not pay referral fees to any third parties. To do so would clearly be a conflict of interest. For example, if you asked your accountant to recommend a financial adviser and you later found out that the adviser had given your accountant a referral fee, you would naturally question the motivation of the accountant. Did he/she make the recommendation based on the adviser’s suitability for your needs, or because of an attractive referral fee?
16. What type of person would be better off with another adviser?
There are many circumstances under which a person would be better off with another adviser. These would include:
- The individual’s risk and return objectives are not well-aligned with the Johnson Harper LLC investment approach,
- The individual is seeking other services, such as financial planning, not offered by Johnson Harper LLC,
- The individual is uncomfortable allowing Johnson Harper LLC to have discretionary management authority over his/her investment assets,
- The individual has an investment time horizon that is too short (e.g., less than 5-7 years) to accommodate potential periods of high portfolio volatility and/or negative returns,
- The individual wishes to include fixed income investments in his/her portfolio,
- The individual is uncomfortable with the use of options as a means to reduce risk and/or generate income.
17. (courtesy of kiplinger.com) Could you tell me why the last two clients that you lost left you? And the last one you let go?
Yes. The last two clients left because, over the period of time I had their assets under management, my performance was well below their expectations (and mine, too, for that matter). Since that time I have worked diligently to improve the process shortcomings that led to the underperformance. To see if these changes are effective going forward, I hope that you will follow our daily performance Tweets.