Index Investor Corner

Ferri: 3 Big Questions To Ask An Advisor

March 26, 2014

Asking the right questions is critical to finding the right advisor, Rick Ferri says.

Investment advisers are everywhere. There are thousands of them. Finding one that’s right for you is a challenge. How do you find an adviser that fits your needs? I’ve read articles that provide 20 questions, 10 questions, etc. Here are my “3 Big Questions” to narrow the adviser universe down to a manageable list of potential candidates.

1. What it your investment philosophy?

How an investment adviser views the process of investing is the most important factor in determining if that adviser will fit your needs. This assumes that you have beliefs in how investments should be managed beforehand. If you don’t, then I suggest doing some soul searching before looking for an adviser that you’ll be happy with over the long-term.

There are four investment philosophies to choose from. These four investment philosophies are based on two strategies for picking individual investments and two strategies for allocating investments in a portfolio.

The two strategies for selecting individual investments are passive and active. Passive-oriented advisers select low-cost index funds and index tracking exchange-traded funds (ETFs) that capture the returns of markets or segments of the market.  Advisers who believe in active management attempt to find actively managed mutual funds or other investments that will outperform the markets and you’ll pay a higher price for those products whether they outperform or not.

The two strategies for asset allocation are strategic and tactical. Strategic asset allocation means creating a fixed allocation to stocks and bonds based on your needs and maintaining this allocation over the long-term by rebalancing back to your target occasionally. Tactical asset allocation is an active strategy that shifts the weighing of asset classes based on the adviser’s belief about the future.

These two investment dimensions form the four investment philosophies:

Passive selection & strategic asset allocation

Passive selection & tactical asset allocation

Active selection & strategic asset allocation

Active selection & tactical asset allocation

If you know where you fit into this list, then it makes your search for an investment adviser more manageable and less time consuming.

2. What services do you provide?

The range of services offered by investment advisers varies widely. For simplicity, I’ve separated these into two services and four basic plans. The two services are investment advice and money management. You can choose an adviser who does one, the other, or both.

Investment advice runs in a range from simple online help to full-fledged wealth management services. Several web-based resources exist today that offer investment assistance through questionnaires and do not require speaking with anyone. The other extreme is a concierge service where you meet regularly with an adviser who mentors you through every facet your personal financial life.

Managing your investments is a separate service from investment advice. On one end of the spectrum is self-management where you invest your own portfolio and on the other end is full discretionary portfolio management where an adviser manages and monitors your money.

Together, the two dimensions of investment advice and portfolio management make up the four broad service models that advisers provide:

Simple advice & self-management

Simple advice & adviser management

Concierge service & self-management

Concierge service & adviser management

If you know the services you’re looking for in an adviser, you’ll be able to narrow the search down using the above service criteria.



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