There is a reason most of us depend on our friends or ourselves for making important investment decisions. It is hard to find a dependable professional source of investment advice. There is no dearth of places to turn to for investment advice, but the decision to put a portion of your financial future in someone else’s hands should be made very carefully after collecting sufficient information.
What are the different types of financial and investment advisors?
- Investment advisor is a professional firm or an individual that advises clients on investment matters. They may manage trust funds, pension funds and personal investments like stocks and mutual funds on their customer’s behalf.
- Financial planners offer investment advice and help clients with savings, taxes, insurance, estate planning and retirement.
- Brokers buy or sell stocks, mutual funds, bonds on their customer’s behalf.
How do I pick a good investment advisor?
Ask your friends and family if they know a good investment advisor. Also compare price quotes from multiple qualified investment advisors listed on B2B marketplaces and ask them for an appointment.
Interview your financial advisor extensively, judging their professionalism and experience. Let him or her learn about your tax situation, fiscal health and long term goals.
Ask the following questions to narrow your search for an investment advisor.
- What experience do you have?
- Where are you registered?
- What investment services do you extend?
- Do you have all the required licenses.
- How much money do you manage for other clients?
- How have your investments performed in the past one to ten years?
- How will you assist me with my investments?
- How are you paid?
- Do you require a minimum investment?
- How are you different from other investment or financial advisors?
Learn how your advisor gains from you
Investment advisors are paid either a percent of the asset value they handle for a customer, a fixed or hourly fee, or a combination of all. They have a fiduciary responsibility to act in your best interest while making investment decisions on your behalf. It is best to at least partially compensate the investment advisor based on his or her performance. In such an arrangement, the investment advisor makes a commission only if he or she meets your investment goals. Be wary of investments that pay a large upfront fee to the investment advisor or lock you into investments that levy a withdrawal penalty.
Check credentials and references
It is important to check references and credentials. For example in the US ask for ‘Form ADV’ for the advisors, which provides you with the advisors background, services offered, mode of payment and strategies used. Form is obtainable from the advisors, the SEC, state security regulator or those advisors managing $25 million or more in client assets. Also inquire about the advisors educational and professional background.
Know how to evaluate your advisors
Once you have hired an investment advisor, remember to evaluate his or her performance at regular interval. It is also important to meet with them regularly to review short and long term goals and to adjust your investment portfolio. Apply the following standards for evaluation.
- Review performance: Check regularly how your money is doing in the investments advocated by your advisor. Evaluate portfolio performance with regard to investment goal and risk tolerance for invested assets. Use a proper benchmark or metric matching your investment strategy for various assets. For example if you have invested in stocks, use the market index as the benchmark for comparison.
- Cost-benefit ratio: Though your money maybe doing well, it is important to ascertain the ratio of investment return delivered by your advisor to his or her earnings. Are you paying more than you thought for the investment return?
- Quality of investment recommendations: Evaluate and test your advisors knowledge of the latest investment approaches, preparedness to stay above the rest in the changing market and insights or suggestions on new investment strategies.
- Working relationship: Your investment advisor should regularly communicate and update you about your investments.
- Personalized service: advisor should regularly review your investment goals and preferences and tailor the investments accordingly. You should be wary of investment advisors who show too much reliance on software programs to create your portfolio.
Hiring a good investment advisor is important to secure your financial future. Hire someone you can trust and can easily communicate with. If you advisor does not perform as expected, set up a meeting to rectify the situation else find someone who could be more helpful.