While I can understand that a financial advisor’s life is private, is there a “proper way” to ask your advisor to invest your money in the same things he or she invests in? My feeling is that either both you and the advisor will come out smelling like a rose … or both of you are going down on the Titanic. Fair enough?
– Clarence
Clarence, your question is a fair and logical one. I think we should look at it from two different angles.
In terms of your advisor’s personal life, I don’t think your question crosses any lines that make it improper. You’re only asking about their investment portfolio – not their pant size or cholesterol levels. So, in that regard, I say ask away if you’re inclined to. Others may disagree.
However, I think the larger context for your question is worth exploring. While it may be perfectly acceptable from a social standpoint, it may not be in your best financial interests to mimic your advisor’s personal investments. And if you need help aligning your investments with your financial goals, consider speaking with a fiduciary advisor.
Why Choose a Particular Allocation?
To lay a little foundation, let’s review why an investor might want to hold one particular asset allocation over another.
Your investment allocation allows you to balance the competing aims of risk and expected return. A portfolio that’s invested heavily in equities is seen as aggressive, while one that’s invested heavily in bonds is likely more conservative. Generally, the more your portfolio is allocated to stocks, the higher its potential returns may be over time. However, this comes with greater risk and potentially high volatility. The opposite is true for portfolios with higher bond allocations. You’ll have less volatility, but likely a lesser return going forward.
If you need help finding an asset allocation that’s appropriate for your risk tolerance and return expectations, you can get matched with up to three financial advisors for free.
Factors to Consider
The right allocation for you may depend on a combination of several factors. Some of the main determinants of an asset allocation are your:
- Risk tolerance: Risk tolerance is a personal preference. Much like we all prefer different flavors of ice cream, we all have our own appetite for risk. Some are comfortable with taking on a lot, others are only willing to take on very little.
- Time Horizon: The amount of time you have to invest your money is important, too. If you will need to access your money in the near future then a volatile portfolio is likely not appropriate regardless of your risk tolerance. Likewise, if you have a long time horizon you have more time to recover from dips in your portfolio and may be able to benefit from higher expected return of a more aggressive allocation.
- Goals: Are you primarily investing for growth, income or a combination of the two? Does this money need to last throughout several decades of retirement withdrawals or are you planning to use it in one lump sum for something like paying off your mortgage?
- Risk Capacity: Similar to risk tolerance, risk capacity is your ability to take on investment risk. For example, let’s say the purpose of your investments is to support yourself in retirement. If 100% of your spending needs are already covered by Social Security, pensions or annuities then you have a high risk capacity. If those things only cover a small portion – say 10% – then you have a much lower risk capacity. (A financial advisor can help you assess your capacity for investment risk.)
- Taxation: If you have investments in taxable brokerage accounts then you need to be mindful of tax efficiency. Realized capital gains, dividends and interest create tax liabilities. One allocation may do better inside a tax-advantaged retirement account than another because you are shielded from those taxes. Someone in a high tax bracket may want to hold tax-free municipal bonds, for example. Someone in a lower tax bracket might be better off with taxable corporate bonds.
Talk to a financial advisor about weighing your own goals and circumstances against different portfolio allocations.
You vs. Your Advisor: Weighing the Similarities and Differences
In light of the factors outlined above, I think it’s important to consider how alike or different you and your advisor are before asking them to invest your money in the exact same things they invest their own money in.
Are you and your advisor the same age? Do you have the same goals and risk tolerance? Do you have similar time horizons? Are your investments held in the same type of account and do you have the same tax situation?
To the extent that you answer “no” to these questions, it may become less appropriate for you and your advisor to hold investments or even have similar asset allocations. Your advisor also may have access to private investments that you won’t be qualified for, including hedge funds and private equity funds.
What’s most important is that your portfolio is aligned with your goals and financial situation – not your advisor’s. (But if you need help finding an advisor, this free tool can connect you with professionals who serve your area.)
Bottom Line
I don’t think there’s anything rude or inappropriate about asking your advisor to invest your money the same way they invest their own money. Hopefully, that question would spark a discussion about the factors I mentioned above. Whether or not it would be in your best interest to invest the same way as your advisor does depends on how similar are your investment goals and financial situations.
Tips for Finding a Financial Advisor
- When hiring a financial advisor, you’ll want to look into their record with the Securities and Exchange (SEC) and see if they have any disclosures of legal or regulatory violations. Here’s what you should watch out for and how to access an advisor’s record.
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in SmartAdvisor AMP, and he has been compensated for this article.
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