Most of us have heard of the legal doctrine “caveat emptor,” or “let the buyer beware.” Caveat emptor warns buyers that if they fail to conduct adequate due diligence before making a purchase, they will have no recourse if the product or service does not meet their expectations.
That sage warning also applies to selecting an investment advisor.
In short, be cautious: Before engaging an investment advisor, look beyond the attractive surface to ensure that what is hidden is equally compelling. We suggest you start by educating yourself about those qualities that are of critical importance for selecting an investment advisor.
Do your own due diligence by conducting a careful inspection of each prospective investment advisor.
To find an investment advisor that meets your expectations and instills confidence, here are some questions to ask that address some of the less visible advisor issues:
- What is the general approach of the firm? Does it purport to provide comprehensive financial services that address most issues affecting your financial well-being? Is its focus solely on the development (but not the implementation) of a financial plan, or just management of the client’s investments (without regard to the financial plan).
- Does the firm’s workforce include the diverse and experienced professionals necessary to provide exceptional comprehensive services? Are investment managers, financial planners, accountants, tax advisors, lawyers and investment advisors on the firm’s payroll? What is their specific experience helping people like you? Do they have the education, training, intelligence, work ethic and client-centered culture necessary to do an outstanding job? Are they skilled at eliciting and gathering relevant facts and identifying relevant subject matter areas? Have they formed teams of competent advisors to address all relevant areas, prepare financial plans, manage their implementation and provide capable investment management?
- Are the firm’s internal affairs, including human resources, compliance, accounting and legal, managed by experienced full-time employees? Investing in this overhead reflects a proactive philosophy often found in well-run organizations. Beware of thinly staffed businesses. Their lack of competent internal staff to monitor operations, the business activities of employees and the accounts of their clients may reflect a low regard for preemptive safety measures, a willingness to expose clients to preventable dangers and an emphasis on putting profits ahead of clients’ best interests.
- Does the firm have a sound legal structure?
- Is the ownership of the firm dispersed among key employees to incentivize strong performance and ensure business community?
- Does the firm use state-of-the-art technology that: integrates information; allows effective cooperation among diverse and geographically dispersed team members; automates the updating of client information; permits rapid detection of and reaction to opportunities and threats; facilitates timely communications with and interactive access by clients; protects the confidentiality of client information and minimizes outages?
- What is the firm’s culture? Does it practice what it preaches? Has it developed a balanced business model that serves as a catalyst for balanced services? Does it have conflicts of interest? What is its disciplinary history and that of its advisors?
You are engaging your investment advisor “as is.” Use the answers you receive to the preceding questions to get a “good look under your investment advisor’s hood.” Your newly acquired insight will serve as catalyst for a decision that meets your expectations.
Investing involves risk. Investment return and principal value of an investment will fluctuate, and an investor’s shares, when redeemed, may be worth more or less than their original cost. Investing in futures involves additional risks and increased complexity in certain security futures investment strategies. Securities futures are not suitable for all investors. Advisory Services offered through Strategic Financial Group, LLC (dba SFGI, LLC in Illinois), a Registered Investment Advisor.
This article was originally published in the December 2017/January 2017 issue of Worth.