Choosing an investment manager or advisor

Warren Buffett seeks three character traits in the managers that work for him: "integrity, intelligence and energy. If a person doesn't have the first, the other 2 will kill you."

Choose a manager who is independent, consistent, communicates well, measures his or her success by his clients' performance, teaches rather than tells, has low fees, and with whom you are comfortable.

• Managers and advisors that are independent of investment company products and pressures can better align with their clients' interests.
• A consistent investment philosophy is a critical success factor for providing long term performance. If the manager abandons a philosophy that is not working (selling low) to move to one that is hot (buying high), you are doomed to under-perform.
• Communication (listening and responding) includes understanding clients' unique objectives and tolerances, reporting (understandable) results to them on a timely basis, and meeting periodically to answer client questions and concerns - making adjustments that meet changing personal and tax situations.
• A manager or advisor should measure his success by his clients' performance - relative to their individual objectives and comparable benchmarks.
• A fee only manager or advisor that charges low fees, minimizes the costs that must be overcome for the value they add.
• Common sense investing is not common. Investing sense must be taught by the advisor and learned by the client. It is the only way to facilitate communication, trust, and to evaluate performance. It takes an educated person to evaluate the amount of risk they are taking, the returns they are getting compared to their risk, comparable benchmarks returns after fees and taxes, and determining if they are on track to meet their objectives.
• Clients must be comfortable enough to confide their hopes (objectives) and fears (risk aversion), and the advisor must candidly discuss success and failure. Is this a person you like (would you do something social with) and trust (is there transparency)?

Common mistakes in selecting investment managers and advisors:

• Referrals: The best method to identify potential advisors is through referrals. However, most people don't know how to evaluate their own manager because they are blinded by their relationship, or because they lack the understanding of how to do a quantifiable analysis.
• Is he or she rich: Successful investors, advisors and managers get rich from their returns over time due to the power of compounding. Rich managers get rich from client fees (perhaps a run of luck attracted a lot of new client funds). While being "poor" should be a disqualifier, having a rich advisor doesn’t mean you’ll end up that way too.
• Large amount of assets under management: The amount of money under management often hinders performance (the law of large numbers and the impact of cash flows) rather than helps, as evidenced by some managers and advisors closing to new clients when they get to a certain size.
• Works for a large brokerage, bank or investment company: Brokerages, banks and investment companies put their business first (generating profitable returns) and the profession second (meeting client needs). In recent years most of these financial institutions have come under scrutiny and been fined for acting against the interest of the individual investor – check your advisor’s history.
• Has other clients in your economic bracket: Managers and advisors that specialize in a certain economic bracket often develop a one size fits all solution, which will not serve all their clients well.
• Has a large number of clients: A large number of clients may inhibit the advisors ability to respond to (new or smaller) client needs.
• Use an accountant or lawyer: Accounts and lawyers will not have the knowledge, time and commitment to manage and advise clients about their investments (most successful ones use an investment manager themselves).
• Use your stockbroker: A commission based stockbroker, by law, only has to make sure his recommendations are suitable for his clients. A manager or advisor has the fiduciary responsibility to put this clients’ interests ahead of his own, a much higher hurdle that better aligns their interests.
• Use a certified financial planner: Certified financial planners have neither the time or expertise to be proficient in all aspects of your financial life (investments, insurance, estate planning, etc.). They should oversee your entire financial program, participating with you as your interact with the manager or advisor to insure your objectives are understood and help you evaluate the results to insure you are on track to achieving them.

Questions that can indicate if you need an investment manager or advisor or need to make a change from your current one.

• How do you respond to under-performing the market for a week, a month, a quarter, a year or 3 years?
• How did you handle the 2000 to 2003 market downturn? Have you participated in the market sufficiently since 2003?
• Does market volatility keeps you up at night, make you delay financial decisions, or make you spend inordinate time 'watching' your portfolio?
• Do you trade in and out of securities often and at the wrong times?

If you had the knowledge to properly evaluate a manager, you could be your own manager.

In money managers and advisors, you don't get what you pay for.

In this blog, we are trying to establish dialog on which you can learn about our integrity, intelligence and energy.