I attended a conference on communications a few weeks ago run by Dimensional Fund Advisors. Dimensional, or DFA as they are known, has an interesting story. They were founded by academics, including a few Nobel Prize winners, who believed that beating the market return over the long term is extremely difficult. However, they also thought that the indices used for most index funds could be improved upon, and they used reams of research to build their own proprietary investment management indices.


The funds have generally performed well, but almost as valuable to me as an advisor is the annual survey they conduct of investors. The study is one of the largest of its kind, and among other things, DFA uses the results to help advisors communicate with clients about their investment management. One consistent finding in the survey has been that there are more clients who have questions about their investments than there are clients who actually ask those questions. As one respondent to the survey put it, “I do want to know about my investments, but I don’t even know where to start in terms of questions.”

If you find yourself in that situation – curious about your investments, but not sure where to start – here are a few questions you might consider:

  • How does the portfolio reflect your needs? You should have some idea of what return you need from the portfolio, and you should also know how much risk you’re willing to accept. The former is pretty easy to quantify, but it can be trickier to know how much risk you’ll take on.One of the best ways I’ve found to quantify risk is what is known as maximum drawdown, which is the largest loss a portfolio has posted – peak-to-trough – over a given timeframe. If you know, for example, that you’re investing $500,000 and the maximum drawdown over the past 20 years in the recommended portfolio was 30%, ask yourself if you’d be comfortable seeing a $150,000 drop in value. If not, you’re likely taking on too much risk.You may have other specific needs as well, including the need to minimize taxes or identified amounts you’ll need from your investments. Your advisor should help you outline those needs clearly and explain how your portfolio meets your needs.
  • What are your advisor’s expectations for the portfolio? This is closely related to the question above. If your advisor can quantify risk and return of your portfolio, he or she must have derived those numbers from some source. We base our long-term risk and return expectations on historical market returns after fees. Although our goal is to perform a bit better than the market over the long-term, we don’t plan on doing so because we know it is extremely difficult.
  • Does your advisor use model portfolios, and if so, how are they constructed? If your advisor works with a number of clients, chances are the advisor uses models that he or she hopefully customizes to meet your specific needs. A few questions about models include how the model itself was constructed – how were the particular asset classes or sectors used chosen, and how were the funds used to invest in those asset classes or sectors selected. There are a whole host of questions related to these two issues, and you can quickly find yourself in the weeds filled with investment jargon. However, these two questions alone should allow you to get a good understanding of your advisor’s investment approach.
  • How do you stay on top of my investment needs as well as my investment portfolio? Once you have a plan and your investments are in place, what is your advisor doing to monitor things? Staying abreast of your investment management needs and adjusting accordingly can be as simple as staying in touch and knowing when your situation changes. When it comes to monitoring investments though, you should understand what your advisor is tracking and with what frequency. Do market or economic changes drive changes to allocation, and what triggers a fund change or a fund review? While constant turnover or change is rarely a good approach to investing, a “set-it-and-forget-it” isn’t advisable either.

If you find yourself in the position of the client above who wanted to know about her investments but wasn’t sure what to ask, start with the questions above. Hopefully, you’ll find that your advisor’s answers are clear and confirm that the investment management approach is a good fit for you.