Considering an investment advisor? Here are the key questions you need to ask
By: Richard Todd, CEO, Co-founder, and Principal
This article was originally published in the Denver Business Journal.
Investment advisors come in all shapes and sizes, and finding the right advisor can be a daunting task. Having more than 35 years of experience working for both Wall Street and independent firms, in management and as a producer, has demonstrated to me that certain key differences exist between firms and their processes — and the way they do business can make or break your success as an investor. The questions suggested here can help narrow down the right fit and help ensure your advisor is working for you.
How many clients do you serve? It is not uncommon for some advisors to serve hundreds or even thousands of clients. They handle numbers like this by spending as little time as possible with clients and utilizing “look-alike” portfolios rather than guidance tailored for unique circumstances. Obviously, neither shortcut is desirable for the investor.
What is your service model? My team and I recommend that investors have a formal, consistently recurring meeting with their advisor, typically quarterly. There are also significant differences in advisor reporting. A high-quality report should not only quantify the returns of the portfolio; it should go deeper into the return and driving characteristics of the specific investment products held. In addition, a quality report will provide attribution as to why performance occurred, both good and bad. Reports lacking this level of detail provide some advisors with a convenient way to mask or hide anything that may be underwhelming.
How are you compensated? Commissions are a conflict of interest, pure and simple. Consider the “fee-only” model to eliminate any misaligned incentives. Indexed annuities and structured products are examples of where commissions are high, and the true costs are buried in the structure of the product. These are often “sold” to investors in return for high commissions paid to the advisor.
What is your investment experience? Credentials are meaningful, but experience is the best teacher. Bear markets are painful, but this is where opportunities are created. Emotions are high in these markets and inexperienced advisors make mistakes. Conversely, money seems easy to make in strong markets and inexperienced advisors discount risks. Look for advisors that have demonstrated experience through a variety of markets and economies.
What is your investment philosophy? For institutional investors, fiduciary law embraces diversification for good reasons. If an advisor touts their ability to “call markets,” run the other way! Instead, engage an advisor who has a thoughtful investment philosophy based on a forward-looking process that is qualitative in nature. An investment method built on selecting products and portfolios by back-testing historical investment returns and flipping them forward is overly simplistic and will inevitably disappoint.
What is your depth of resources? An advisor should have quality internal and external resources to help drive their capital markets assumptions and the due diligence on investment products, managers and strategies that they are recommending. Anyone can crunch numbers, but the process should be heavy on the qualitative side. Beware of “purchased” track records as well. These are firms that have good performance but the people and work that built that record are long gone. Expertise, reputation and earned credibility are not transferable qualities that can be bought or sold with a name.
What are your values? Your values and your advisor’s values should be aligned. Further, the culture of the advisor’s organization is important as well. As Peter Drucker said, “Culture eats strategy for breakfast.” If a firm’s culture is poor, the organization will suffer from unhappy professionals, high turnover and, consequently, inconsistent advice and client service.
What are the portfolio fees? Low fees are the only “free lunch” in the investment arena, but one should not evaluate fees in a vacuum. Bond management is very inexpensive when compared to equity management. Low-cost passive management has a strong place in portfolios as well. Alternative investments like real estate, private equity and debt and hedge funds can be good diversifiers but are more expensive to manage and also costlier to own, but beware of the high commissions that brokers can charge in these alternative products. Investors should be acutely aware of why something is being recommended. Again, commissions taint objectivity and, consequently, investment advice.
Conclusion
Unfortunately, the investment advisor business is largely an “eat what you kill” industry. Advisors spend a large part of their time prospecting for new clients as opposed to actually advising, servicing and building client relationships. The differences among advisors and their firms are significant. Investment advice is not a commodity. By asking the right questions, the advisor selection process can be a catalyst for a long-term, highly rewarding relationship, benefitting you and your family for generations.