5 questions to ask before you pick an investment adviser

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I sat down with an elderly couple this week. I was invited to review their current financial status and and based on my review, introduce them to a reputable asset management firm who would take additional steps to ensure the safety of funds. It was really interesting to listen to the investment decisions they had made for a couple of years. What was not interesting, was listening to tales of how they had been swindled by a particular stock broker who decided to sell off their entire portfolio of shares without their knowledge. The stock portfolio, he sold off, was worth N10m. and he didn't remit a dime back to them. Now, that's enough to give an elderly retired person a heart attack. But they survived and now they are both actively involved in selecting investment options for themselves. I was invited over to share my knowledge of safe investment options they can invest in during retirement. I couldn't get over the loss they experienced due to fraud and it inspired today's post. There are many reputable asset management firms you can work with to help you make investment decisions but you still need to be involved in the process. You shouldn't completely delegate this part of your life for any reason. Picking a financial adviser can be quite complex, that's why it's important to be careful and thoughtful when selecting an investment professional to help you save, invest and protect your savings. A little reasearch can save you a lot of stress eventually. So what are the questions to ask before you hand over your life savings? What is your investment approach? If you have a strong preference for a particular philosophy, ask the advisor what his or hers is. For instance, if you prefer to use low-cost funds, you can ask whether they plan to used actively managed funds or passive investments. Wacks gives an example of the kinds of differences in investment philosophy that can arise: “I say to the client, ‘I’m not here to make you a lot of money. If you want someone to do that, and trade stocks back and forth, then I’m not the person. If you’re looking for someone who makes investments consistent with your risk tolerance and goals, then I can help you.’ What's your management style? Financial planners can manage your money for you or manage your money with you. As different people have different needs when it comes to money management, there is no right way to work with a planner—it’s up to you to decide how hands-on you want him to be. When you sign on with a financial planner, there will be a written agreement of how the two of you will manage your money. Read this carefully, and ask questions if you’re unsure about anything. Are you signing your accounts over to this planner? Will he check in with you before making a trade, or when rebalancing your accounts? If you’re uncomfortable with anything in the agreement, bring it up immediately. Again, one guiding word to keep an eye out for is “fiduciary.” This means that the planner will always work in your best interest—even above his own—which is the bottom line when it comes to getting help with your bottom line. How do you get paid? Identify how an advisor is compensated to gain a better understanding of their potential incentives and conflicts of interest. Typically, advisors are paid through: 1) client fees ("fee-only"), 2) commissions, or 3) a combination of both ("fee-based"). Anytime you interact with someone calling themselves a financial advisor, make sure you understand how they are being compensated for the service they are providing. More conflicts of interest arise when commissions are involved. It becomes harder for the advisor to stay independent and put your interests ahead of their own." "Even if they claim the contrary, advisors are always influenced by their compensation method - if not intentionally, then even inadvertently or subconsciously, What are the details of your historical returns? “Another red flag of investment fraud is the ‘I can’t tell you’ defense,” says Rodgers. “When an financial advisor says that the investment strategy that he or she wants you to put your hard earned money into is secret or too complicated for you to understand, you should be very careful.” It’s important for you to understand how your investment produces returns. Returns are accomplished in a number of ways, including the financial advisor selecting undervalued stocks, following trends or exploiting market inefficiencies. But, at the end of the day, you need to understand the strategy, and if your financial advisor won’t explain it, consider it a red flag.