Selecting an investment manager is an important task for any business owner. It takes time to find a person you can trust, but it is time well spent.
Professional qualifications
An adviser should have appropriate levels of education, professional qualifications, experience (typically at least five years handling investment accounts for clients) and technical competence. You may want to ask business associates and friends for recommendations, and check references.
Interview the individual and ask about his or her investment philosophy and specialties. Find out how many clients the adviser handles, as well as how much money the average client invests.
You should feel comfortable that the firm’s style, as well as that of the individual representative, matches your own in order to develop a mutually beneficial relationship.
Investment performance
Choose a manager who has consistent performance over long time periods. Focusing on historical performance is a classic error in choosing a money manager. Studies have shown that the top-performing manager in one period typically underperforms in the next.
The industry’s rule of thumb is to compare returns over at least the past five years in different periods to assess the manager over a complete market cycle.
However, this is only a sound predictor of skill if the investment philosophy, process and personnel of a firm are the same over the period the track record was established. Confirm that key personnel are still in place.
Additionally, a good investment counseling firm is convinced of its style and security selections and will not change its approach for the wrong reasons, such as pressure from clients and consultants to perform better. A firm with a goal of long-term growth may not perform as well in a declining market, while investors who are seeking “value” tend to perform better in this environment.
Making a change could be a major mistake, since it could be made at the point where the market moves the other direction.
Research capabilities
Research lets an adviser construct a logical, thoughtful investment strategy. Inquire about the amount of research, the frequency and the type.
Ask if the firm performs its own research or uses an outside source. It should provide you with data sources, including the source of historical data used to perform useful analyses.
Compensation
It’s important that you understand exactly how your investment adviser is compensated. There are basically two types of compensation: fee-based and commission-based.
Fee-based managers typically charge an annual fee based on account value. Commission-based managers typically charge a commission based on the investments purchased. Whichever approach you choose, be sure you are receiving value for the fee or commission you are paying.
Also, determine whether an adviser’s performance data includes the impact of fees charged to clients, as well as whether he or she receives compensation from anyone other than clients.
Performance reporting
An adviser should provide an accountability of your portfolio with detailed reports, preferably quarterly but at least annually. Good reporting provides you more information and a better understanding, helping you make informed decisions.
Your portfolio’s return should be compared to an index that is an appropriate measure for the type of portfolio you have. Ask to review a sample copy of reporting before selecting an adviser. How to reach: Frank Wojcik, senior portfolio manager, Fifth Third Bank, (614) 233-4413 or [email protected]
