I'm in the same boat many times with new clients. Just recently I was presented with a 401(k) managed by a leading 401(k) fund provider. The administrator of the fund had that uneasy feeling that the fund wasn't doing that well. He knew something was wrong but like the car owner didn't know the questions to ask.
I gave him a brief rundown of my recommended approach to managing assets using low-cost well-diversified index funds, concentrating on asset allocation and carefully monitoring performance relative to a well-defined benchmark. This set the backdrop for questions.
We then looked at the 40(k). It was comprised of load funds that charged a front load of 5.75%. Annual expenses were on the order of .66%. He said he was sure he didn't pay the load but would ask his broker.
Here's a question to ask:
Has there ever been a load on any fund invested in this account?As it turns out, sometimes loads are dropped once funds exceed $1 million. Thus, this fund may not be paying a load on investments today - to which the broker would answer that it doesn't pay any load - but it has in the past!
Can you specify for me all payments received by you and costs charged to this account over the past 12 months?The sad fact of the matter is that the industry is totally opaque when it comes to costs and expenses and how people are compensated. Sadly, it is rife with conflicts of interest.
In discussing performance, the client said he can get performance anytime he wants by calling up his broker. That's a bit different, of course, from being able to go online and retrieve performance through the close of the previous business day anytime you want for any combination of account portfolios. But that's OK if the client wants to go through that hassle. The real question to ask is:
Can I have up-to-date performance for year-to-date, 12 months, 3 years, and since inception compared to a relevant benchmark?It is natural that, unless you are an investment professional or have taken the time to educate yourself, you wouldn't think to ask about a benchmark. You wouldn't appreciate the importance of setting up a benchmark beforehand. Think about this: when you buy a car, it is likely that you study average miles-per-gallon, average annual maintenance costs, and even likely trade-in value. All of these are benchmarks, i.e., reference points that aid in your decision. Sadly, similar benchmarks are purposely avoided in the investment management arena.
Even the fact that these questions have to be asked tells you something!