You need help with your investments. But how do you find the right advisor for
your needs and goals? * Where do you start? * Which advisor is right for you?
* How do you know you are asking the right questions? Selecting an investment
advisor can be a daunting task. Answering the following questions will improve
your chances of success. # 1: What do I want to accomplish? The most important
question investors can ask is one they ask themselves. It is essential to know
what you want to accomplish. As Steven Covey said, "put first things first." *
Do I want to manage my own investments? * Do I want advice on how to manage my
investments? * Or, do I want to hire a skilled manager to direct my investments
for me? These are different questions, requiring clear but distinctive
answers. For example, if an investor determines she would like advice on how to
manage her investments, then she needs to be prepared to take some
responsibility for her investment's performance. That is because advice is just
an opinion or recommendation about what should be done. Ownership for her
investment's performance still rests squarely on her shoulders. On the other
hand, if an investor hires a portfolio manager to manage her investments, then
by definition that manager is taking ownership and responsibility for the
performance of that account. Once investors are clear on what they want, what
questions should they ask a potential advisor? # 2: How do you get paid? This
is the most important question an investor can ask a potential advisor. Why is
this question so important? Because aligning compensation with the investor's
goals, growing his account, is the most powerful way to ensure his goals are
realized. Advisors and financial planners are compensated in many different
ways, but the majority of advisors either charge commissions or fees, or both.
Commissions Commissions or sales charges come in several forms. First, investors
pay a commission when they buy or sell a stock, bond, or Exchange Traded Fund
(ETF). Investors may also pay a commission when an advisor sells them a mutual
fund. These charges are often called sales loads or sales fees. Commissions
tend to work best when an investor knows exactly what he or she wants, or if
that investor plans to make very few transactions. The problem with
commissions or sales loads is that the investor pays the advisor up front.
Imagine if realtors were paid up front to sell a house. What incentive would the
realtor have to ensure the house actually sells? Additionally, commissions can
often drive a product sale, which may not meet the investor's goals. Fees There
are two types of fees. First there are flat or hourly fees, similar to how an
attorney or CPA bills his or her clients. With hourly fees it is important to
define up front which services will be performed, and to receive an estimate of
the total cost. The second type of fee is based on assets under management.
This fee is usually between one and three percent of the account balance per
year. This compensation method works best when an investor hires an advisor to
manage his or her portfolio. When the compensation method is a fee, based on
assets under management, the advisor can only get a raise if he or she grows
the investor's account. # 3: How will you invest my money? It is critical that
the advisor has a clear plan for investing the client's money. * How will the
advisor determine which investments are right for the client? * Is the plan
customizable or one size fits all? * Will the plan change with the client's
changing goals? * How would the investments change in a deteriorating
economic environment? The answers to these questions should be clear and
intelligent. Ask for clarification about why the advisor's recommendations fit
your goals. If the prospective advisor is recommending mutual funds, ask why he
or she is not using index funds. Because according to Morningstar, the mutual
fund rating company, 90% of all mutual funds and annuities fail to outperform
the S&P-500 index. # 4: Do you have an exit strategy? This is where most
advisors fail. Nothing goes up forever. Therefore, it is imperative to know
when to take the chips off the table. Warren Buffett once said that there are
only two rules to investing. Rule #1: Don't lose money. Rule #2: Never forget
Rule #1. POP QUIZ: If your portfolio loses 25% of its value this year, what
return would you need next year to break even? Investment Year #1 Starting
Value = $100,000 Return = -25% Ending Value = ? Investment Year #2 Starting
Value = $75,000 Return = ? Ending Value = $100,000 Did you get the correct
answer? If you lose 25% of your portfolio, it takes a 33.3% return, just to
break even! If you lose 50% of your money you need a 100% return, just to break
even! That is why it is critical not to lose money. The main reason so many
investors lost money in the last down market is that they, or their advisor,
did not have an exit strategy. An advisor needs to have a predefined plan for
what he or she will do if an investment loses money. Remember, there is no
reason to be emotionally attached to any investment. Investments are designed
for one thing and one thing only: to make money. # 5: What is your track
record? This is where you find out if an advisor is driven by results or
commissions. When investors hire an advisor for recommendations, or to manage
their account, they need to make sure that the advisor has a track record of
success. * How have the advisor's client accounts performed in down markets? *
How have the advisor's client accounts performed in up markets? * How does the
advisor's performance compare to a benchmark, like the S&P-500 index, in up and
down years? This is where you want to ask for numbers to back up the "sales
pitch", and it should not take days to get them. If the advisor sidesteps this
question or downplays performance, do not walk away, run! Making sure the
advisor has a history of success is critical. After all, if you are not paying
to receive results, what are you paying for? Summary Well formulated questions
are the tools used to dissect any problem. Take time to ask tough questions of
yourself and potential advisors. Key questions to ask are: 1. What do I want to
accomplish? Create a solid foundation by defining your goals. 2. How do you get
paid? Make sure compensation is aligned with your goals. 3. How will you invest
my money? Ask tough questions. Expect intelligent answers. 4. Do you have an
exit strategy? Make sure the advisor has a predefined plan to prevent major
losses in your account. 5. What is your track record? If you are not paying for
results, what are you paying for? These questions should provide an investor
with an excellent base for hiring an advisor. Once you find the right advisor,
you move beyond solving a problem, you create results. Contact Talisker
Investment Group at (208) 860-4244 or www.taliskergroup.com. (c)2005 Talisker
Investment Group, LLC. About the Author Daniel Wiggins is the President and
Chief Investment Officer for Talisker Investment Group, LLC. He is considered a
leading investment manager in the area of delivering absolute returns.
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