21 Tips On How To Evaluate An Investment Adviser

Questions and Answers We Think Are Important

How can investors stay out of trouble with another part of Wall Street – the big investment houses that can deal out free drinks, dinners and claims of jackpot winning products?

To stay focused on your game plan and avoid going bust, Erik suggests these 21 tips to beat the house(s).

Before You Speak to An Adviser

1. Why are you looking for an Investment Adviser?

1. • Has there been a life changing event?
   • Are you not happy with your current adviser or plan?

2. What is important to you in an advisory relationship?

1. • Consider making a list before you start to interview advisers, as everyone has different priorities.

1. • • A red flag should go up if an adviser is uncomfortable when you bring a list of questions.

3. What are you investing to achieve?

1. • Investing should be about achieving your goals, not about beating someone else or investing in someone else’s model.

4. How do you feel about risk, return and liquidity?

1. • The word “feel” is important, if you don’t feel comfortable with your plan, you are likely to buy someone else’s model, product or make changes at the wrong time.
   • Understand your liquidity needs.

1. • • Everyone is different and has a different level of cash on hand that makes them feel comfortable.

5. What types of investments do you understand and feel comfortable with?

1. • Don’t invest in any product or model that you don’t understand and feel comfortable with over long-term time periods.
   • Keep-it-simple often performs just as well, if not better.

6. How do you evaluate investments?

1. • What type of information is important to you and why?
   • Benchmarks of success should be based on your plan, not on someone else’s set benchmark or indices.

7. How much control do you want over day-to-day investment decisions?

1. • Take time to review this before you interview an adviser.  Do you want to delegate, be actively involved or somewhere in the middle?

When You Speak to An Adviser

1. Are you always a fiduciary?

1. • Yes, should be the only answer and the adviser should be willing to put that in writing.
   • If yes, ask how they define what a fiduciary relationship means to them.
   • Some firms that claim to be acting in a fiduciary manner or have fiduciary values are not true fiduciaries who are bound to act in your sole or best interest.

2. Does any outside firm or entity ever pay you, share their fees with you or pay any of your expenses?

1. • No, is the only simple answer.

3. What are your total fees, expenses, mark-ups or commissions and will you disclose them in plain simple language?

1. • Yes, should be the only answer.
   • You should also understand the calculation structure of any fees and if they are negotiable.

4. What conflicts do you have?

1. • Everyone has conflicts.
   • If an adviser says that they don’t have any, it might speak volumes about how transparent they really are.

5. What is your investment philosophy?

1. • An adviser should be able to walk you through what types of investments they would use, the fees of these investments, frequency of trading and explain how the portfolio will be benchmarked and monitored.
   • We believe that all clients should have an Investment Policy Statement (IPS) in place to lay out clear guidelines for your portfolio.

6. Are you able to provide projections about future returns or direction of the market?

1. • Yes, will be the likely answer, but an adviser should say that they will likely be wrong more often than they will be correct.
   • Investment plans should not be anchored on the ability to time or predict the future of the market.

7. What type of reporting do you provide and can you show me examples of both statements and investment reports?

1. • Reporting and communications should be clear, concise and easy for anyone to understand without much translation required.
   • Any investment returns should be net of all fees, expenses and any commissions.

After You Meet with an Adviser

1. Immediately following a meeting, take time to reflect and collect your thoughts.

1. • Write down your feelings and follow-up questions, and share them with a trusted counselor.

2. How did the strategies presented to you align with helping you achieve your goals?

1. • Remember, an investment strategy should be customized specifically to you.

3. How did they describe their investment process?

1. • It should be straightforward and easy to understand.
   • A process that is overly complex and relies on too many assumptions and estimates should be taken with a grain of salt.

4. Did they suggest that they can do too much for you?

1. • No one firm can do everything well.
   • How candid a firm is about their focus and strengths and what they don’t do is important.

5. What did they suggest was a reasonable estimated return you might receive on your portfolio going forward?

1. • If they strongly suggest that past returns or hypotheticals is a good indication, beware.
   • The past does not equal the future and hypotheticals include numerous assumptions and estimates (refer back to Question #6 in the section above).

6. Did you feel like they were selling too hard and potentially overpromising?

1. • First impressions and feelings about how hard someone is selling are often telling.
   • Sometimes a firm should even suggest that it is not a good fit for them.
   • Both the firm and you need to feel like it is a good fit and view each other as Partners.

7. Do you believe they can be a trusted Partner?

1. • If there is even a second thought here, it probably isn’t the right fit.
   • The right adviser should make you comfortable and excited about your new relationship.