This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Sunday, February 1, 2009

How to pick a financial adviser

In the wake of recent turmoil in financial markets, many investors are looking for professionals to help manage their finances. Many have never worked with a professional before, and many have decided to change because of the way their previous adviser handled this latest crisis, be it a lack of personal attention, lack of communication, poor returns, etc. We feel it is important that the public is aware of some particulars of the financial industry to aid in the process of choosing a financial adviser. After all, this choice will have a greater impact on a person’s long-term well-being than almost any other professional.

In the field of finance, many professionals refer to themselves as “financial advisers.” This is, in many cases, a misnomer. Many, in fact, are more salesmen than investment advisers. They look at the particulars of a potential client (age, income, number of dependents, etc.) and develop a portfolio that is meant to be in line with that individual’s risk tolerance. After a portfolio is established, the adviser will periodically (typically quarterly, semi-annually or annually) sit down with the client and see if there are any changes in the risk profile that need to be reflected in the portfolio. These advisers typically receive most of their income in the form of commissions made on a sale. They do not conduct extensive research to see where the economy and stock market are going in the future. Instead, they rely on investments that are sellable; those with good back stories, impressive numbers and glossy paper. And while history can be helpful in choosing an investment, remember that investments react to economic conditions. Since the conditions rarely repeat, neither will the returns.

There is another class of financial professional that consists of people (us included) who refer to themselves as “investment advisers” or, more simply, as “money managers.” These individuals have an entirely different, more hands-on approach. They spend considerable time researching current market conditions and thinking about how they will play out in the future. They then try to gauge what investments will have the best potential for returns in the environment they see going forward, and position client funds accordingly. They do not sell any particular investment, but instead they market their own experience, knowledge and expertise that should (hopefully) be beneficial to a client, who most likely doesn’t have the time or ability to spend such extensive time and effort managing their own money. While these professionals may also earn compensation from commissions, typically a greater degree of their income is derived from management or investment advisory fees. Because of their money management style, some can be criticized for a lack of diversification. In reality, however, their clients’ accounts typically receive more attention because they are relatively similar.

There are many questions that can be asked when interviewing a financial professional to determine how they manage money. And it is important to think of this as a process. When an investor begins their search for an adviser, we hope they don’t simply crack open the yellow pages, call the first number they find and walk in with a check. Think of it as a job interview, since that’s what it really is. Financial professionals are interviewing for the opportunity to work for you. And, as is the case with any job hiring, you as the interviewer should know what kinds of questions to ask so that you can decide with which manager you are most comfortable working. The following are some examples:

1. How much experience does the adviser have in the financial industry? Have they held any related positions, and if so for how long?

2. What is their money management system? Ask them to describe their approach to managing clients’ money. You might also want to ask if this is substantially different from how they handle their own money. While this subject would be taboo at a cocktail party, it shouldn’t be here.

3. How much personal attention can each client expect? How often is each portfolio monitored?

4. Ask about communication. If you call the office, are you going to talk directly with the person watching your money or with a call center in India? Do they send out newsletters? If so, do they write their own or subscribe to a newsletter service and just put their name on them?

5. How has their long-term performance been? While short-term results can throw off averages (especially this past year), advisors should still have a decent long-term track record.

6. How are their fees structured?

7. What safeguards do they have in place against fraud? With all the recent fraud cases, you want to feel secure, even if you have an investment that loses money. But what you don’t want is to find yourself in a situation where your advisor disappears with all your money.

If you’ve been losing sleep at night over your investments, we urge you to go out and look for a professional. Whether it’s your first time working with an adviser or you just need a change, it is important to find an arrangement you are comfortable with. Interview several potential advisors, and resist the urge to make a decision on the spot. Instead, go home and think it over before making your final selection.

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