Ten questions to ask advisers before volatility sets in

As one of the country's largest unit trust company and leading asset managers, it believes it is best to ask investment advisers the right questions up front, rather than let volatility prompt the questions at a later stage.

The JSE retreated by more than 20% in late 2007 and the early weeks of 2008 only to bounce back strongly. Nerves are understandable, though consumers who do thorough financial planning and risk preferencing seem content to ride out the turbulence.

Kim Zietsman, head of Stanlib's single-manager unit trusts, notes: “We pioneered adviser ‘tool-kits' to encourage investment decisions based on investment needs and risk tolerance.

“The process encourages question-and-answer sessions among investor and consumer. Unfortunately, the procedure is not yet universal and some consumers still fail to ask the right questions, leaving room for doubt in times of volatility.”

But what sort of questions should consumers ask? Stanlib provided a ‘starter pack' of 10...

1. How long should I stay invested in this product to have good prospects of capital growth?
   If the product is equity-based, the timeframe may be five years or more. If you liquidate early, you might not achieve the desired gains.

2. What sort of ‘fit' does this give with the rest of my portfolio?
   You might already hold shares, cash, property and other assets. You need to know if the new product would make you ‘over-weight' in one asset class, making you vulnerable if values fall in this sector.

3. Does the new product improve the balance of my portfolio?
   A spread of investments can reduce risk. Prudent diversification usually covers cash, equities, bonds and property; plus on-shore and off-shore options.

4. Is this the right product at my age?
   Risk tolerance and product selection are linked to age, future plans and your attitude towards risk. If you are 25, debt-free and single, you usually take more risk than an older person with family responsibilities. As you near retirement, you might consider a bigger focus on income and capital stability.

5. What if the market falls?
   If the risk profile is accurate and a balanced portfolio is backed by a solid cash position, volatility may not affect you. Lower prices may simply create value opportunities. This is why it is important at the outset to establish your time horizon.

6. What alternatives are there?
   The first product on the table might be good, but not ideal. Discuss alternatives and build up your knowledge of the basic features of each product type.

7. What are the benchmarks over what period?
   Most products are measured against an index or yardstick like inflation. The benchmark and timeframe are a handy guide to performance, especially if you are paying performance fees.

8. What does this term mean?
   Always ask; never assume. Some consumers assume a real return fund is designed to beat inflation every time. Yet the stated objective may be a real return over ‘any rolling two-year period'. It may fail to beat CPI over shorter timeframes. Make sure you understand points like this.

9. What charges are applicable?
   Clarify the adviser's charges and unit trust charges. Unit trusts operate in a competitive market. Upfront charges are negotiable between the intermediary and the investor, and should depend on the level of professional advice/ service rendered.

10. When do we review?
    Always make a review date. Advisers are sometimes criticised for not being more hands-on even though they often receive charges for ongoing advice. Consumers share the responsibility for ongoing assessment. So set a review date before closing the consultation. Repeat the date-setting process at subsequent meetings. Circumstances and risk tolerances change - so should your financial plan.