How To Choose An Investment Advisor You Can Trust
This article will speak specifically to choosing an investment advisor/manager, as opposed to choosing a financial advisor. A later article on choosing financial advisors/CFPs will be followed by this.
Investment advisors come in different varieties and can be found at different types of firms. Most investment advisors will look to place clients into a medley of mutual funds. The mix of investments is likely to be 60% stocks/40% bonds, with the mix of bonds likely to increase with age. In this case, the primary jobs of the advisor are to pick a mix of the types of equities and bonds that best suit the clients' goals and then choose the specific funds that are attractive because of historical performance, current holdings and/or the background of the investment managers of the funds. The type of funds that the advisor chooses for their clients should be based on the clients’ risk tolerance and investment horizon. Additionally, market conditions for each class of securities that the fund is addressing should weigh heavily on investment decisions.
Another style for investment advisors is to invest in individual securities. This is the route that I chose and have maintained since I founded Noble Advisors in 2009. Investing in a diversified group of individual securities can be an effective strategy for reducing correlation to the overall market. For information on why you might want to reduce your portfolio's correlation to the overall market, please refer to an article that I previously wrote. As a potential client, you might also take notice that for an investment advisor to be able to invest primarily in individual securities, the bulk of their time must be spent on stock and market research, as opposed to constantly selling and marketing, like many investment advisors spend the bulk of their time doing.
'Ask the advisor what they have learned from their experience so far'
With the understanding of the two primary types of advisors having been addressed, lets dig into the primary qualities to dig into when choosing an investment advisor. To start with, whatever I write here, make sure to come up with questions of your own that you think are relevant.
· How much experience does the advisor have and what type of experience exactly? Ideally, you want to pick someone with at least ten years of investment management experience, whether that be as an advisor, portfolio manager or investment analyst. I use the ten-year figure because an advisor is more likely to take into account risks and rewards of investments with equal weight if they have been through a full economic and market cycle. Also, Ask the advisor what they have learned from their experience so far, whether it be 10 years or 30 years.
· What are their educational credentials? This starts with what school the advisor went to for undergraduate studies and what their major was. However, perhaps more importantly, have they gone back for more education, whether that be through certifications and/or graduate studies. Why did they/didn’t they pursue further studies and what did they learn that will benefit you as a potential client? If the advisor put work into attaining additional credentials in the middle of their career, whether it was through going back to school, earning certifications or even doing pro bono work, it might reflect a keen interest that the advisor has in making sure that they stay up to date on the investment management landscape and providing the best outcomes for their clients.
· How do they approach investing? What is their investing style? What are they personally invested in? A knowledgeable advisor should be able to articulate the answers to these questions well. If they are steeped in their work, they will be able to go on for a long time on this topic. Feel especially confident if the advisor’s investments are aligned with the approach that they are suggesting for you.
· Why should you choose/trust this advisor and their firm? Ask what the benefits are for the client to sign on with the advisor as well as the firm that they work at.
· How long has the advisor been at their current firm and how many firms have they worked at in their career? While moving firms is common in financial services, if an advisor is able to maintain their position at one firm for an extended period of time, it could indicate that they have good client retention. To that end, you can ask the advisor how many clients they lose each year and why. If an advisor has been at a firm for an extended period of time, it should indicate that they know the products and process at their firm well.
· Does the advisor financially benefit from placing clients in any particular securities? Obviously, if an advisor will financially benefit from placing clients in particular securities, there is a conflict of interest present. If you as the client decide that you like the advisor and want to work with them despite the conflict, ask what the fees associated with the products are and how the performance of the products compares with comparable products from other firms.
· References. Asking an advisor to provide references could be somewhat of a heavy lift from the advisor if they constantly have to go back to the well of their clients and ask if they will act as references. However, you are putting a lot of money on the line and if a good reference will make the difference, it is worth asking for it.
Some people might not feel comfortable asking so many questions, but this will help you to get a clear picture of the advisor’s background and how they think. Make sure that by the time you leave the meeting, all of your questions have been answered and if you think of anymore after you leave, send the advisor a note.