Key Considerations For Hiring An Investment Manager

Hiring an investment manager is a big decision, and it's important to know what to look out for. Here are some key things to consider before taking the plunge:

- Your financial situation: Take an extensive look at your finances, including your net worth, expenses, financial goals, and risk tolerance. This will help you understand if you need an investment manager and what type would be suitable.

- Fiduciary standards: Ensure your investment manager abides by fiduciary standards and legal obligations to act in your best interests. Registered Investment Advisor (RIA) firms and their employees are fiduciaries and are required by law to act in your best interest.

- Qualifications and experience: Look for a manager with relevant qualifications, such as a bachelor's degree in financial management or economics, and experience in the field.

- Services offered: Understand the range of services provided by the investment manager. This may include institutional investing, investment tax planning, account asset management, tax-loss harvesting, and retirement planning.

- Fees and costs: Be clear about the fees charged by the investment manager and what services these cover. Understand their fee structure, whether it's a percentage of assets under management, an hourly rate, or a flat fee.

- Performance and track record: Research the investment manager's performance and track record. Ask for long-term performance data and reviews from previous clients.

- Communication and support: Find out how often the investment manager will communicate with you and what methods they use. Ensure they are responsive to your inquiries and provide timely support.

- Regulatory compliance: Verify the investment manager's regulatory compliance. Check their registration with relevant authorities, such as the U.S. Securities and Exchange Commission (SEC) or state regulatory bodies. Look into their disciplinary history and ensure they have a clean compliance record.

Understand the different types of financial advisors

There are several types of financial professionals that fall under the umbrella of "financial advisor". Here are some of the most common types:

• Registered Investment Advisor (RIA): A registered investment advisor is a person or firm that provides financial advice and buys and sells investments on behalf of their clients. They are fiduciaries, which means they are legally required to act in their client's best interest. RIAs typically earn an advisory fee for managing a client's investments rather than sales commissions. Depending on the value of the assets under management, an RIA may be regulated by the US Securities and Exchange Commission (SEC) or a state's regulatory authority.
• Registered Representative: Also known as a stockbroker, a registered representative buys and sells stocks, bonds, mutual funds, and other investment products on behalf of their clients. They typically earn commissions on trades and are regulated by the SEC, the Financial Industry Regulatory Authority (FINRA), and state securities regulators.
• Financial Planner: A financial planner can be a registered representative, an insurance agent, or a Certified Financial Planner (CFP). A CFP must adhere to strict education and training standards, including holding a bachelor's degree or having equivalent experience and completing continuing education credits. Financial planners may be regulated by different entities depending on their specific qualifications and services offered.
• Wealth Manager: A wealth manager advises clients on their financial goals and investment approaches, often including retirement, estate, and tax planning, as well as investment management. Wealth managers are typically registered representatives and are regulated by the SEC, FINRA, and state securities regulators.
• Robo-Advisor: A robo-advisor is an automated online investment manager that uses algorithms to manage a client's assets. Robo-advisors do not typically provide human-supplied financial advice and are regulated by the SEC. They charge fees for their services, which may be based on a percentage of the assets under management, a flat monthly fee, or a fee for each trade.

When choosing a financial advisor, it is important to consider their qualifications, regulatory status, and whether they are a fiduciary. It is also essential to understand the services they offer and how they charge for those services.

Evaluate their qualifications

When evaluating an investment manager's qualifications, it is important to assess their educational background and industry knowledge. A bachelor's degree in a relevant field such as financial management, economics, business administration, or finance is typically the minimum requirement. Additionally, further certifications or designations, such as the Chartered Financial Analyst (CFA) charter, Chartered Alternative Investment Analyst (CAIA) charter, or Financial Risk Manager (FRM) designation, can enhance their credentials and expertise.

Beyond formal education, practical experience in the field is crucial. Look for candidates who have successfully managed investments for individuals or businesses and have a track record of generating substantial returns. They should be well-versed in various investment strategies, risk analysis, and portfolio management.

When evaluating their qualifications, consider the following:

• Educational Background: Do they have a degree in a relevant field? What additional certifications or designations do they hold?
• Industry Knowledge: How well do they understand the intricacies of investing, risk management, and portfolio construction?
• Practical Experience: Have they successfully managed investments for clients, and what were the outcomes?
• Investment Strategies: What approaches do they use to generate returns, and are these strategies aligned with your goals and risk tolerance?
• Risk Management Skills: Can they demonstrate their ability to analyse and mitigate investment risks effectively?
• Track Record of Success: Do they have a proven history of making sound investment decisions and achieving favourable outcomes for their clients?

By thoroughly evaluating an investment manager's qualifications and expertise, you can make a more informed decision about hiring them to manage your financial assets.

Ask about their fees

When hiring an investment manager, it is important to ask about their fees. Financial advisors have different methods of charging their clients, and it often depends on how often you work with one. Some financial advisors follow a fee-only system, while others are commission-based.

It is worth noting that there is a range of fees that financial advisors charge. Some charge a percentage of assets, which is typically around 1% but can be higher or lower. Others charge a flat fee or an hourly rate. It is important to understand how your financial advisor is compensated to ensure their interests are aligned with yours.

Additionally, it is crucial to consider the value you are receiving for the fees you are paying. A good financial advisor should provide you with valuable advice and help put you in a better financial position. They should also be able to explain their fees clearly and transparently.

When deciding whether to hire a financial advisor, it is essential to evaluate your financial situation and determine if their services are worth the cost. If you have a simple financial situation, you may be able to manage your investments on your own. However, if you have a more complex financial situation or prefer to outsource investment management, a financial advisor may be a worthwhile investment.

Remember that you can always choose to drop your financial advisor after a few years once you have gained enough knowledge and confidence to manage your investments independently.

Assess their investment strategies

When assessing a candidate investment manager's strategies, it's important to understand their investment methodology and whether it can generate the rates of return you need over the long term.

For example, an investment manager might seek to earn investment returns by holding large groups of stocks that cover nearly all the stocks available in a particular category, such as US large company stocks. This approach, known as index investing, is favoured by many investors, including large institutional investors. While investment returns are volatile no matter what methodology is used, index investing tends to be a reliable approach to generating returns over time.

Another type of investment methodology involves trying to improve on the average rate of return offered by the market. This can be done through selecting stocks and bonds that an investment manager believes will perform better than average or by choosing when to buy and sell securities with the aim of holding them as they rise. These investment strategies rely on the skill of the investment manager in identifying mispriced securities or timing opportunities and often have significant costs to execute, which can reduce investment returns if the manager is unsuccessful.

Research indicates that most managers using these methodologies do not generate investment returns above the market rate of return on a cost-adjusted basis. However, some investment managers do outperform the market over a number of years. Your task is to try and work out whether a candidate manager's recent outperformance was based on skill or luck, and if it will continue. Ask for and review long-term performance data (e.g. three-year, five-year, and ten-year returns) and request a detailed explanation of the investment process to try and determine how repeatable it is. Ask yourself if you think the manager can consistently discover new information that other investors have missed and turn that information into above-market returns.

Check their reputation

When hiring an investment manager, it is important to check their reputation thoroughly. Here are some key points to consider:

Firstly, it is crucial to verify the credentials of the investment manager. Check their educational background and professional qualifications. Do they have a degree in a relevant field such as finance, accounting, or business management? Are they certified or licensed by reputable organisations? Remember that anyone can call themselves a financial advisor, so it is essential to look for professional designations.

Secondly, research their work experience and track record. How long have they been in the industry? Do they have a proven history of successful investment strategies and client satisfaction? Ask for long-term performance data, such as three-year, five-year, and ten-year returns, to evaluate their consistency and expertise.

Thirdly, ensure they adhere to fiduciary standards and legal obligations. A fiduciary is legally required to act in your best interests and must disclose any conflicts of interest. Ask if they will be acting as a fiduciary and verify their registration with the relevant regulatory authority, such as the US Securities and Exchange Commission (SEC) or their state's regulatory body.

Additionally, look for online reviews and testimonials from their clients. What do their previous and current clients have to say about their services? Are there any red flags or recurring issues mentioned? It is also worth checking for any disciplinary actions taken against them. A spotless record is ideal, but if you find any concerns, be sure to inquire about them.

Finally, consider the reputation of the firm they are associated with. Are they registered with the appropriate regulatory bodies? Do they have a good standing in the industry? Remember that the firm's reputation and compliance record are equally important as that of the individual investment manager.

By thoroughly checking the reputation of your prospective investment manager, you can make a well-informed decision and ensure that your financial interests are in capable and trustworthy hands.

Frequently asked questions