Financial Advisor Questions And Answers – Risk Analysis Section

Managing one’s assets isn’t always easy. The more assets you have the more time is needed to care for those assets.

Over time, that can start to feel like quite a chore. I know it is absolutely necessary to be on top of managing one’s assets but it doesn’t mean it won’t get tiring. There are reasons why financial advisors and wealth management firms exist. 

I’ve had meetings with financial advisors in the past. I wanted to see what they can offer and what I can outsource to them to make my own life a bit less complicated.

Some of those discussions were insightful and caused me to think a bit more about how I manage my assets. But, ultimately, I never went with the services of a financial advisor. 

There are a few reasons for that. 

One, management of one’s assets is highly personal and customized. We can all say just give me the best returns, but how we get there matters as well. 

There are people who tend to be more conservative and can’t stomach much volatility. A separate investment portfolio is needed for them when compared to people who have a high tolerance of risk and don’t mind wild swings in asset value.

I figure no one knows my own personal preferences and risk tolerance better than me.

Another reason why I didn’t move ahead with a financial advisor is control. I didn’t feel comfortable giving up control of my assets to someone else. 

And lastly, it was hard to swallow the fees. Charging in the neighborhood of 1% of assets is a pretty high amount. 

So I decided to continue to manage my assets myself. 

At some point in the future, I might still engage a financial advisor or wealth management firm to look after my assets. But at this point in my life, I still feel better handling that myself.

Questions Asked During Financial Advisor Meetings

Financial advisors have their standard questions they ask in order to better know their clients, what they want to accomplish, where they want to be, their risk tolerance, and other information that would be helpful in better understanding the right investment mix and advice.

I took a list of questions from different financial advisory firms and answer them here. That way, you can get some perspective on how I view the world. 

Some of the new client questionnaires are long. I will focus on a few questions from the risk profile analysis section.

Questions From The Risk Profile Analysis Section

Which of the following best describes how you would use your portfolio to achieve your goal? 

1. Capital preservation and current income with relatively small fluctuations in annual returns and market value. 
2. High current income with relatively small fluctuations in annual returns and market value. 
3. High current income and some growth of capital with moderate fluctuations in annual returns and market value. 
4. Moderate growth of capital and some current income with moderate fluctuations in annual returns and market value. 
5. Growth of capital with moderately high fluctuations in annual returns and market value. 
6. Aggressive growth of capital with high fluctuations in annual returns and market value. 

My Answer: A mix of 4 and 5

My goal for my portfolio is to achieve a mix of current income along with growth of capital. I am comfortable with moderately high fluctuations in annual returns and market value as long as there is still the current income coming in.  

I have always enjoyed current income. That is one of the benefits I find in building my rental portfolio.

Having a steady passive income stream is important for me to not rely solely on my corporate job for my livelihood. 

I have experienced 3 major financial economic disruptions. Those disruptions resulted in job losses totaling tens of millions over the past 20 years. That is a constant reminder of how insane it is to be solely dependent on an employer to make rent or put food on the table.

Rental real estate provides monthly rental income. That extra stream of income puts my mind at ease when it comes to my finances. I know at the bare minimum I will have some money coming in each month. 

It is even better that my monthly rental income cash flow stream can cover my bare essentials including meeting my mortgage payment and food bill. 

Once my basic financial needs are met, I feel comfortable taking more risk with the rest of my investment portfolio in order to chase a higher return. 

That is a reason why, in addition to my real estate portfolio, I have a large percentage of my portfolio in publicly listed stocks. The majority of the stock portfolio is invested in the S&P 500 index and technology stocks. 

I also have exposure to private equity funds. I intend to increase my exposure to private equity and private investments going forward in addition to more exposure to listed technology stocks.

Which statement best describes your approach towards investing? (Please choose one.) 

1. I take a conservative approach to investing. I am uncomfortable with volatility and will accept lower rates of return in order to have stable portfolio values. 
2. I take a moderate approach to investing. I expect the value of my investments to fluctuate, but not too drastically. I will accept periodic, small losses in my portfolio, but I expect long-term returns somewhere between the historical return of bonds and stocks. 
3. I take an aggressive approach to investing. My investments may fluctuate as much or more than the stock market does. While some years I might have a loss, over time I expect my returns to be as high or higher than the historical return of stocks. 

My Answer: 3

I have never been afraid with market fluctuation. It might be because I’ve been fortunate to have been continuously employed over the past 20 years with raising wages. This happened despite experiencing 3 major economic disruptions over that span.

I take a very long term view with investing. I measure investment returns in decades and don’t really mind the market fluctuations.

That isn’t to say market fluctuations don’t affect me. Obviously, when the market tanked earlier in the year due to the pandemic, I wasn’t feeling too hot about losing 7 figures in the stock market. 

But once again, with a long term approach to investing, I can stomach that market down. I view it as temporary when viewed with a multi-decade lens. 

In fact, I made the most money when I continued to dollar cost average into the stock market when the stock market experienced a significant downturn for an extend period of time such as during the Great Recession.

The Great Recession, as challenging as it was to see my investment values plummet, presented a tremendous amount of opportunities to acquire risk assets at a depressed price. People who put their money to work in 2008 to 2010 should see a very robust return on their investments. 

My multi-decade investment time horizon buoyed with uninterrupted employment for years gave me the confidence to stomach significant market fluctuations in search for greater return on investments. 

Also, it does become easier to handle market fluctuations when a portion of my investment portfolio is in rental real estate. Having a relatively steady cash flow stream in rental income helps with anxiety induced by wild swings in the market.

Additionally, I don’t see flashing ticker prices every second on changing real estate value. Real estate lacks a very liquid and transparent market which helps calm the nerve as well.

My rental real estate portfolio might be down 7 figures. But that market price loss isn’t constantly flashed in front of my face like in listed stocks.

That certainly provides for more calm. 

Based on your financial goals, how long is your investment horizon? Your investment horizon begins now and lasts through the end of your financial goal (retirement, college, home purchase, etc.) (Please choose one.) 

1. Short-term (0-3 years) 
2. Intermediate-term (4-6 years) 
3. Long-term (7 or more years) 

My Answer: 3

I am surprised at how they have classified the time periods.

To me, short-term would be anything under 7 years. Why would I engage a financial advisor to manage my money for less than 3 years? If I need that money within 3 years, I would try to be as safe as possible with my investments.

Compound return is the most powerful financial force in the known universe. There simply isn’t enough time within 3 years for compound return to work its magic. 

I can’t see how financial advisors are able to provide true value to clients in such a short period of time, especially after factoring in a 1% management fee. It is probably smarter to put the money into an interest bearing CD instead.

I would classify intermediate terms as 7 years to 15 years. Long-term would be 15 plus years for me. 

I don’t have any immediate need from my investment portfolio. At this point, I plan to work another 10 years.  

I hope to be financially independent within 10 years. That means my passive cash flow should be enough to support my household lifestyle. That is when I plan to lean on my investment portfolio to provide for my livelihood.

I also need to worry about college tuition payment 10 years from now. But my 529 college savings plan balance is pretty robust right now. 

With a little help from the stock market, I hope to be able to cover at least 80% of my kids’ college expenses. I don’t plan to cover 100% of their college expenses as I believe they should have some skin in the game as well.

At some point in the future, I wouldn’t mind buying a bigger home. But at this point, I enjoy my current home and there is no immediate need to trade up. 

When do you expect to initially begin withdrawing cash from your investment portfolio? (Please choose one.) 

1. I do not plan to withdraw cash from my portfolio. 
2. Within the next 3 years. 
3. Within the next 4-6 years. 
4. Within the next 7 or more years.  

My Answer: 4

I plan to work another 10 years. That means if things work out on that front, I wouldn’t need to touch my investment portfolio and can reinvest any portfolio return.

But once again, it is comforting to know that a portion of my current investment portfolio consists of rental real estate. Those rental properties throw off a monthly rental income stream.

I have very little money worry about making my mortgage payments or providing for my family with that monthly rental income stream. I sleep better at night because of that.

I already mentioned a few expenses coming up in the next 10 years or so. I currently plan to work another 10 years, so I might start tapping my investment portfolio after 10 years.

I also have kids heading off to college as well. 

My current savings rate is over 50% of my post tax income. I hope to continue that into the future. Therefore, if I remain employed over the next 10 years, not only do I have no needs to touch my investment balance, I can add more to it. 

How much do you plan to withdraw from your portfolio during the time period indicated in the above question? (Please choose one.) 

1. I do not plan to withdraw cash from my portfolio. 
2. 1-3% annually. 
3. 4-6% annually. 
4. 7% or more annually.

My Answer: 3

I like to create a perpetual giving portfolio. That means I never want to touch my principal in order to live the lifestyle I desire.

I want my portfolio to be able to produce enough current income so that I can live off of the income alone.

My investment objective is to have a blended return of 7% upon retirement with a current income percentage of at least 4%. That way, I can live off of that 4% without having to touch the principal. And the principal will grow with the rate of inflation so that it doesn’t lose buying power over time. 

That doesn’t mean I won’t use some of the principal money for enjoyment. But even then, it has to be put into items that can appreciate in value.

For instance, I don’t mind putting that money into a nice home which can go up in value over time. I also don’t mind investing in artwork or luxury watches which can also increase in value over time.

In fact, I am a big proponent of putting money into items that can provide usage now but can continue to appreciate over time.

To the audience: How would you answer the questions above? Do you use a financial advisor to manage your assets? If yes, how has that experience been for you?

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SoM @ SportofMoney.com

Many people work hard to better their physical and mental health. What about their financial health?

I started this blog back in 2019 to help people better their financial health as well.

My financial journey began with tens of thousands in student loan debt. Over the span of 20 years, I am close to achieving financial independence.

I truly believe anyone can get to strong financial health. Hopefully, this blog can help you on your financial journey to greater wealth and financial independence.

You can read more about me here.

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