4 Steps To Perform Your Own Investment Analysis

Two of the most common questions that I get as a financial coach are, “Do my investments make sense for me?” and, “Am I paying too much?” Generally, those are questions that I can’t answer in one minute, but with the right tools and a few minutes anyone can figure out the answer.

When I was a financial advisor trying to convince a potential client that I could do better than their existing advisor, here are the steps I would take – anyone can do them with the right knowledge.

How to do a self-analysis of your investments

Step 1 – Take a Risk Tolerance Assessment

You must know what amount of risk makes sense for you. I don’t care about your friends, relatives or co-workers. Does your mix of investments make sense for you?

To find out, this Risk Tolerance Assessment takes about 2 minutes or less, and will then offer you general guidelines as to how much money you should have in stocks, bonds and cash (aka money markets or stable value funds). If you have two entirely separate goals, such as a college fund that you need in 10 years and retirement in 25 years, then take the assessment more than once, each time with that specific goal in mind.

Step 2 – Figure out exactly what investments are held in your funds

Just because your fund says one thing in their objective doesn’t mean that it’s clear what your fund actually owns. If you really want to know, you can actually find out using a tool on Morningstar. Here’s how:

  1. Get a copy of your statement, then look for your account holdings. You are looking for fund names such as ABC Growth Fund Class R5. Even better, see if you can find the “ticker symbol” for each fund, which is a multi-letter code such as “ABCDE.”
  2. Go to Morningstar.com and enter the name or ticker symbol.
  3. Once you’ve found the Morningstar page for your fund, click on the tab labeled “Portfolio.”
  4. This tab will break down the mix in the fund by stocks, bonds and cash – keep in mind that Stocks include both US and non-US stocks, while bonds will simply be labeled as Bonds, and cash or money market will be listed as Cash.
  5. You can really geek out if you want by digging into how much is in large company stocks compared to mid and small sized companies or look at what sector of the economy your fund focuses on (such as technology or manufacturing, etc.) You may even find some fun in looking at the Top 10 holdings in each fund to see if you have an overload in a certain company.

The most important thing is that when you add up all the money in stocks based on this analysis it is close to what your risk tolerance suggests. The other key thing to check is that everything doesn’t look exactly the same. So if all of your funds are mostly large companies or all of them are US Stocks, then you may be out of balance.

Step 3 – Analyze fees

Once you have determined that your investments are or are not matching up with your risk, the next step is determining how much you are actually paying the mutual fund companies through fees, which are also called “expense ratios.”

While Morningstar has good info on that, the FINRA Fund Analyzer is a more helpful tool for this purpose. Here’s how:

  1. Again, enter the fund name or the ticker symbol into the analyzer, and when you’ve found your fund, click on “View Fund Details.”
  2. Scroll down to “Annual Operating Expenses” to see how the expenses for your fund stack up against its peers.
  3. Also look to see if you must pay a fee to get into or out of that fund.

Obviously, the ideal is to invest in funds where the fees built into the fund are at or below the average fee for that peer group.

Step 4 – Compare your advisor fees to benchmarks (if you have an advisor)

If you are a do-it-yourself investor, you can skip this last step, but if you have an investment advisor who is helping you with your investments then the last step is figuring out if you are paying them more than average.

Commission-based advisor

If you are investing in funds that showed a lot of up-front commissions or “Contingent Deferred Sales Charges” or “CDSCs” in Step 3, then that means your advisor is paid by commission. If so, then the key here is to make sure that the commissions are comparable to industry averages and that you are holding onto the funds – or at least staying in the same mutual fund company options – for about 7 years or longer in order to realize the value of the up front fees. This allows you to minimize the overall fees paid and avoids paying commissions too frequently.

“Fee-only” advisor

If your advisor is “fee-only,” then they don’t charge commissions, and instead they charge a management fee based on the total value of your investments. Generally, this is a fee that is collected quarterly, so in that case each quarter the fee is applied to your balance and then divided by 4. So, if you have a 1% fee on your $100,000 account, your fee would be $1,000 per year or $250 per quarter. Keep in mind that this is in addition to the fees you explored in Step 3, and will show up as a separate fee on your statement.

How much is too much?

As for what your fee should look like, in 2018, the average advisory fee was 0.95% and many people use 1.0% as an industry standard. A good rule of thumb is that if you are paying close to or above the average, then you should be receiving value for that in the form of other services such as financial planning, tax planning, etc. to justify the higher fee.

That said, it can vary quite a bit depending on the size of your account. For accounts between $0 – $250,000, the average advisory fee was 1.1% and over $5 million that dropped to 0.7%. In other words, the more money you have, the lower the percentage, but probably higher the dollar amount of your advisory fee.

Ultimately, it’s up to you to determine if you’re receiving proper value for any advisor-based fees. If you don’t think you are, then consider shopping around.

What about robo-advisors?

Today, there are lots of robo-advisors out there that will do most of the same things when it comes to managing your investments that a typical advisor would do, but the fees tend to be lower, ranging from 0.25 – 0.35%. Does that mean everyone should be using robo? Like anything else, some people are very comfortable with using technology as a tool and getting planning or guidance somewhere else. If that is you, then a lower-cost robo advisor may make sense.

If, however, you are like many folks and prefer someone you can call when you have questions who is intimately familiar with you and your situation, then paying up to that industry average may be worthwhile. Lastly, if you like your advisor but their fees are above average then you can always try to negotiate with them for lower fees and/or additional services like financial planning, retirement or college planning, etc.

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