When making the decision to partner with an investment professional you are essentially hiring someone to look after your hard-earned money; that’s no small feat. For this reason, it is entirely justifiable and necessary to approach this much like an interview. Here, you will see our take on some of the pertinent questions you should be asking your potential future investment professional.
Does the manager use active or passive management?
A whole article could be written the subject of passive vs active investing alone but suffice to say that if you are paying for professional money management, you need to know what it is you’re getting. If you are merely looking for exposure to certain markets, a passive investment strategy may be suitable for your needs. However, perhaps you are looking for an active manager that will target specific opportunities within a market. The key is being able to differentiate between the two and to make sure you’re getting what you signed on for.
What is their investment strategy and does it align with your views?
Similar to the previous question, you need to be comfortable and understand what you’re getting into. For example, do they only invest within North America or are they a global manager? Do they invest only in large cap stocks or are they looking more broadly? Are they top down managers or bottom up, value based or growth based? What are the firm’s long term views and beliefs? You don’t need to know all the ins and outs per se but it’s useful to get a feeling for what it is a particular investment advisor is trying to accomplish.
What are they charging and is that information transparent?
Firms that are registered as Portfolio Managers charge a percentage fee based on assets under management. As an example, their fee may be 1%. However, financial advisors are often compensated based on products that they sell and are compensated by way of commissions. Underlying funds and the purchase of individual stocks can also have costs attached. At the end of the day, it’s important to know and ask what are the all in or total costs if you choose to hire a particular investment professional.
What is their track record in good AND bad markets?
We’ve been in an 8 year bull market so the fact is that most managers will have good track records when looking specifically within that period. The true test is how a manager can perform in periods of sustained turmoil.
Understandably, some may not have that long of a track record to illustrate this which is why it is important to take whatever information is available in tandem with the other questions, specifically whether you are on board with their investment strategy.
How long have they been in business?
Someone with longevity to a particular firm is generally a positive and speaks both to the individual and the strength of a firm. Again, similar to looking at a resume, if a particular investment professional has jumped ship too often this can be a red flag.
Do you get along?
The relational aspect one has with their investment professional is vital. If you don’t trust or feel connected to that person, it is likely you won’t be eager to approach them and the relationship might not last. Much like choosing a family doctor, it’s important that you feel your Portfolio Manager is someone you can talk to easily, are comfortable with and trust. At the end of the day, this can trump all the previous questions depending on the strength of that relationship.
When is it time to reevaluate?
This is often a difficult decision to make...when do you pull the trigger when you’re unhappy? This largely depends on the circumstances that have lead you to that point but if you have lost confidence in either the investment strategy, the Manager or the strength of the relationship comes under question, it may be time to move on.”