The Way I see it, there are Three Questions You Need To Ask Your Financial Advisor. Now this could be for a financial advisor that you’re already working with, or it could be for a financial advisor that you’re thinking about working with that you’re interviewing. This post is going to be geared a more towards people that may be in the retirement planning stages, maybe even going into retirement.

Question Number One, What is my plan for income? This is a really big one, because there are a lot of financial plans out there that tell people that they’re on track with their retirement goals, but it sometimes leaves gaps. How, specifically, are we going to get the income out of the portfolio? We like to use a bucket strategy for our clients. What that means is that once we’ve identified some of those retirement income gaps, we want to set up three buckets.

Bucket number one is going to be what we call our income now bucket, we usually like to keep one to two years worth of cash flow reserves there, very liquid, very safe investments that we can take money out of and not have to worry about what the stock market or bond market might be doing. Then we like to keep in the middle bucket usually another three to five years worth of income needs. Some things that are going to produce some income or dividends or interest that are going to go back to refill that first bucket. Finally the long term bucket is going to be what we’re going to hope to keep up with inflation, provide some long-term growth and wealth accumulation for the portfolio. So think about what is the plan for income? And where is the money coming from? How are we minimizing some of the risks with that?

Number Two,  What Happens To My Portfolio When Interest Rates Go Up? This is something we just recorded another video about, we went into more detail about this. Right now, as interest rates are now starting to creep up, we want to know what that means for bond prices. It means that bond prices are actually going to go down when interest rates go up. So how is your financial advisor going to address that potential risk? And how are they still going to produce income that you’re going to need for your retirement? What happens to my portfolio if interest rates go up?

Finally, Number Three, How Will My Asset Allocation Change Over Time? This last one, we’ll spend a little bit more time on. One of the things that we recognize here in our office is that we go through different periods of the market. In fact, there’s actually some great charts out there that talk about the long-term track record of the Dow Jones Industrial Average, so we go through these extended bull and bear periods. In fact, we actually just had a long pronounced bear market period, that really began when the internet bubble collapsed in 2000. We had what we called the Lost Decade from 2000 to 2009, where the S&P 500 actually produced a negative return over an entire decade’s period, and now, we’re starting to get back into more of an upswing. So, one of the questions that a lot of our clients ask us and I think that you should be asking either us or any financial advisor that you’re working with is how will my asset allocation change over time? And will we ever see a significant reduction in the amount of, say, stocks that we have in our portfolio if the market starts going in the wrong direction?

What we find is that many financial advisors have a more long-term buy and hold approach, and that may be great during what we call the wealth accumulation or retirement accumulation phase, but it’s not so great when we start needing to take some money out of those portfolios. So how are they going to do that? We recognize those different bull and bear market periods for our clients’ portfolios that we manage, and if we took a look at a moderate portfolio as an example, we might have, at some times when stocks are really strong, 70% of the portfolio in stocks. But conversely, if some of our indicators turn negative, we might drop that all the way down to 20% of the portfolio. And again, it’s not to say that we have a crystal ball to know when the highs and the lows of the market are, but we’re trying to recognize some of these longer-term trends, and it’s all based off of very specific trigger mechanisms that we look at and follow that give us those indicators when to buy and sell. So, you want to know and understand how that asset allocation might change with your portfolio.

The followup question to that is, if they say, “Well we might change or this is what we might do.” Ask them if they have specific triggers that will direct them to make those changes, because if it’s going to be based off of some subjective market analysis or research, when we’re in the heat of the moment, it’s going to be very difficult to do that. So we want to have an unemotional trigger that’s going to give us those buy and sells.

Those are three questions that I think you should be looking at, especially as you go into retirement.