How to Conduct Due Diligence on an Investment Advisor

As an investor, you need to be able to weigh and measure the qualities of any firm that you decide to trust your assets with.


Investment advisors (IAs) come in all different shapes and sizes. You can find one in every state of the union and in almost every country. They all compete to manage — simply put — other people's money (let's just call it "OPM"). IAs provide different products to their client base and the blueprints of these products are usually referred to as investment models or investment strategies. These investment models/strategies are the foundation of any actively managed mutual fund that can be found in your retirement plan; but maybe you feel like you need professionals to directly manage your assets. Well, never fear, because IAs can offer specific models/strategies to provide you with the customized portfolio you require, which also adheres to your appetite for risk. IAs provide these services for a fee, which is usually based on a small percentage of the overall amount of which they are responsible for managing. A simple concept, right? An IA makes their money by safeguarding and growing your money.

As an investor, you need to be able to weigh and measure the qualities of any firm that you decide to trust your assets with — whether you are investing in a mutual fund or hiring an IA to manage a trust or pool of assets. The primary prerequisite to earn your business is performance results over time; however, there is another quality you, as an investor, should consider prior to pulling the trigger: the IA's corporate culture.

Why is this important? It is important because you are entrusting an IA to manage the money you've worked hard to accumulate. You, as the investor, need to make sure the firm that manages your money acts as a trusted fiduciary. When you select an IA to assume this important responsibility, first make sure you've done your proper research. Here are some places to search.

• Start with the IA's website. Get a feel for who they are and how they do what they do. The firm should be able to describe its unique investing philosophy in a way that's easy to understand. Make sure you review the backgrounds and experience levels of the portfolio managers who are assigned to manage the fund/investment strategy in which you'll have an interest. Make sure these managers have significant experience.

• If you are investing in a mutual fund, the next website you should visit is one that would provide an independent opinion of the product, portfolio managers and firm you are considering. An example of this type of website is Morningstar.

• Once you've reviewed the IA's website and incorporated an independent opinion of the firm, it is a good practice to review the IA's regulatory disclosures that are readily available on the U.S. Securities and Exchange Commission's website. It only takes a moment or two to pull up the information you'd need to get an understanding of the IA's history, ownership structure, size, regulatory history, affiliates and other mandatory disclosures. Once you've landed on the website and performed a simple search on the IA's firm name, you'll notice a couple of documents referenced that are "clickable." The one you first want to flip through is called the Form ADV Part 1. This disclosure, while sizable, provides you with an overview of the IA that you should understand prior to handing over a check, and it must be updated annually.

Once you've completed your research, you should have a higher degree of comfort with the IA with which you invest. Performance does matter; however, understanding who the firm is, who the professionals assigned to manage your money are and the IA's regulatory history allows you to make a more informed decision at the outset. This is your money. You worked hard for it, and you shouldn't trust some nameless, faceless entity to manage it. Instead, you should do your research so you can sleep a bit better each night with the understanding that seasoned professionals are safeguarding your portfolio.

You wouldn't hire a new employee without reviewing their resume, obtaining a reference or two and running a background check, right? Well, it's important to apply that same logic to your investment advisory selection process.

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