Do I Need Professional Management? – A prospective client should first ask himself “How am I doing”? An investor who has the time to identify his objectives, risk tolerances, personal and family obligations, assess performance over several market cycles is satisfied with his results need not consider retaining a professional money manager.
Who Manages the Money? – Is the advisor a money manager or a facilitator? This question cuts to the issue of where the advisor is adding value for the client. A money manager prepares an Investment Policy Statement that outlines the client’s investment objectives, directs the investment of assets in accordance with a well-defined investment discipline and monitors the decisions through performance measurements.
A facilitator, often a consultant who allocates assets, typically aids the client in identifying and implementing
his investment objectives, reports and assesses performance but does not make hands-on investment decisions. That function is performed for a fee by a portfolio manager, who structures a portfolio of assets to fit the client’s objectives. A facilitator/consultant is usually retained by corporations and fiduciaries to protect them from liability and to service large asset bases. If you use a consultant you may want to ask why you pay multiple fees for services.
How is the Advisor Compensated? – Though disclosed in the SEC Form ADV Part 2 A ( a disclosure document) used by all registered investment advisors a client should be clear as to whether their advisor is compensated by fees, commissions or both. It is generally agreed that in those cases where the advisor receives commissions or fees for products sold to the client there is the potential for a conflict of interest. A conflict of interest exists when a professional money manager is required to credit back fees to a referral source. For this reason the advisor must disclose any such arrangements in the ADV Part 2 A and other documentation as may be required.
What is the Advisor’s Investment Discipline? – The advisor should be able to present in Form ADV Part 2 A and in sales and marketing materials a definitive statement of what investment discipline is followed in managing some traditional equity disciplines are: growth, small cap, big cap, value and indexing. There are many derivations of these that reflect the expertise and experience of the advisor. Regardless of what discipline is employed, the client must first determine if the services and investment discipline are compatible with his investment objectives and, more importantly, with his level of risk tolerance.
Having determined that, the client must then observe whether, over time, the advisor maintains that discipline in a variety of market conditions. Any investment decision that seemingly represents a departure from the stated methodology should be questioned. How do you review this information? Look at sale marketing materials and Form ADV Part 2 A disclosures.
What is the Advisor’s Track Record? – Request a statement of historical investment performance. It is most desirable that it represents a period of at least ten years, describe the types of accounts under management and disclose whether performance is stated net of all fees and transaction costs. In the case of newer investment advisory firms a ten year track record will not be made available. You should look to current and former clients of the advisor and check out the advisor on the SEC’s website and other databases for regulatory violations. A personal track record is equally as important as one of investment performance.
How About Personal Service? – If you purchase mutual funds or participate in pooled investments you will generally interact with a sales representative or facilitator and have little or no need for personal contact with the manager of the account.
Direct interaction with a portfolio manager may be more important for you if you wish to have an account that reflects your own well defined investment objectives For this reason you should determine whether the primary contact for the investment advisor is a marketer, a broker or a portfolio manager etc. It is our recommendation to retain an investment advisor you trust with whom you feel you can relate and communicate. Are you comfortable communicating your investment needs and objectives?