Choosing an investment adviser is a decision that shouldn't be taken lightly.
Spending time in the interview process will help mitigate potential problems down the road as your expectations meet the reality of market fluctuations. Here are some key questions to ask to help you determine how your financial adviser really stacks up during volatile times.
1. How have my investments performed?
Ask your financial adviser to measure your portfolio's performance against an index that mirror's your asset allocation not just over the last month but over the last few months and years to help determine the value they are adding. If your investments are doing much worse or better than those benchmarks ask for an explanation and make sure it makes sense.
2. Do my investments match my time frames and goals?
Make sure that both you and your advisor have agreed on the type of risks that you'll be taking with your portfolio and have some idea of the degree of volatility that your asset allocation represents. The "Risk & Reward - Asset Allocation" fact sheet available on my web site is a good guide to begin with to help understand the ups and downs that are associated with any one mix of stocks and bonds. Time frames and goals should be set though a process that determines what your goals are (such as providing retirement income or building sufficient funds for retirement) and determining what type of returns are needed to get you to that goal.
3. What investment philosophy does your financial adviser follow?
Strategic asset allocation? Tactical allocation? "Core" and "satellite" portfolio management? Do you expect "absolute returns" while your adviser is managing for "relative returns"? Make sure you and your adviser are on the same page so that when market volatility impacts your portfolio you know what your adviser's response will be during the moments of crisis. Another resource within my website is Ben Graham's "Investment Rules to Live By" a fact sheet on the rules by which many portfolios’ should be managed.
4. How do you plan to measure my performance and communicate with me?
Market declines create the opportunity for you to measure not only just how well your financial adviser handles your investments, but how well your particular asset allocation reflects your tolerance for risk. Checking your progress against the goals initially agreed upon can help you decide whether or not different actions should be taken to reach your goal. Quarterly, bi-yearly, or annual meetings to chart the progress towards your goal should be planned in advance. After all, helping clients through difficult market conditions without upsetting the long-term plans and goals agreed upon is one of the best reasons to have an advisor in the first place.
