Choosing an investment advisor or money manager should be a careful process based on diligent research. The best relationships start with a shared investment philosophy, followed by a building of trust through education and transparency.
There are many common misconceptions around financial advice, and there are several important questions to ask before you begin any new relationship.
To expand on that theme, I want to detail some red flags that often come up in my conversations with clients who have tried various quasi-advisors in the past. Many of these people have taken a part-time interest in investments — or they may not be who they say they are. Uncovering that information should be of vital importance to your wealth.
There are a great number of legitimate traders and investors on social media who run newsletters or other private services to help a select list of private clients. Over the years, I have befriended some genuine professionals whom I would reasonably let manage my own money if I weren’t already in the business.
Then there are the guys with the pictures of Ferraris and supermodels in their profiles. They have online handles, like “billionairetrader92” or “darknightvixslayer.” They want you to believe they turned $1,500 into $15 million in the last two years.
Maybe they even have some illegitimate testimonials or penny stock advice they pan out to try to hook you in. I love when they include their first-place trophy in the 2012 stock-picking contest you’ve never heard of, too. These guys aren’t advisors. At best, they are speculators.
At worst, they are full-blown criminals.
Be wary of anyone who advertises unreasonable performance or is hiding behind a cloak of anonymity. There is a reason why; trust me on this.
Now, I don’t care what religion you practice, but there is always that guy who manages money at church. The instant leap of logic is that you share common philosophies on ethics or life, so you must be aligned similarly in your investment outlook, as well. It’s easy to throw out the due-diligence playbook because he must be on the up and up if he goes to the same church as you.
The sad part is, that logic doesn’t always translate to successful results in the real world. In fact, it’s a terrible way to pick your investment advisor. You may feel an initial kinship with this person, but you have no real idea of how they will manage your money or what their fees are unless you ask.
You may also have a much harder time parting with them if the relationship sours, knowing that you must face them each week, regardless.
My advice is to avoid the conflict whenever possible or treat them like you are hiring any other professional to manage your wealth. Put a strict emphasis on due diligence, boundaries and expectations.
This is one of my favorites. Remember that guy who sold you that whole-life insurance policy? Well, now he’s doling out advice on which mutual funds to own. The unsound logic here is that you made an initial financial transaction with this person to protect your family, so why not extend the relationship to the rest of your net worth?
Maybe they want you to put all your retirement money in that guaranteed annuity. Maybe they want you to pick up a few mutual funds that their firm recommends. These suggestions are more than likely going to result in fees and commissions driven to the salesmen rather than driving long-term results for the client.
The reality is, there will be little to zero service once the initial transaction is complete, and they may even keep pestering you for more money or referrals.
Be very wary about locking up your liquid investment portfolio into high-fee insurance products, especially those with caps on gains and restrictive exit fees.
Here’s a call from your CPA: “I’ve got great news! You are getting a refund on your taxes this year, and I highly suggest you place the money in an IRA for your retirement. Oh, wait. You don’t have an investment advisor? Don’t worry about that. I can get you set up with some investments that will work great for you.”
“You can align yourself with someone who has your best interests at heart and is not just trying to line their pockets to the detriment of your savings.”
Accountants, like insurance salesmen, specialize in one thing. And they should stick to that thing.
Why let a part-time investment guy using an obscure broker-dealer put your money to work in funds that are likely just going to generate more fees for him? They don’t have time to watch your portfolio. They don’t have the tools to research the investment landscape to ensure you are invested in funds with the lowest possible fees or best long-term results.
They just open Barron’s or talk to their broker for a few minutes and place you in a group of funds with questionable motivations. If those funds also generate some back-door revenue for them without you knowing … what could that hurt? Well, it could hurt your net returns.
OK, so you did some research and found a true registered investment advisor who has been in the business for a while. They make all the right promises and seem to know what’s happening in the market. That’s a good first step. But did you look up their record online?
Every advisor registered with the state or the Securities and Exchange Commission has a historical record that you can view instantly for free using tools such as the Financial Industry Regulatory Industry’s BrokerCheck. It will tell you if they have any previous issues with clients, have continually jumped firms or even had a previous judgment rendered against them. All this information must be disclosed on their U-4 (which is the record the SEC uses to keep tabs on financial professionals).