Financial advisors are really good at cooking up investment schemes. I’ve seen stews made up from crazy lists of gold, commodities, all cash, pink-sheet stocks—you name it, some advisor, somewhere, is recommending it as the only way to go. So, may I recommend you choose something other than the plat du jour? Try asking your advisor how much of his or her personal money is invested in the recommendation.
For mutual funds, this information should be in a Statement of Additional Information, usually grouped with the prospectus literature on an investment company’s website. From my point of view, it’s most interesting to know this information for actively managed funds. For index funds, it doesn’t much matter as the manager is making far fewer decisions. Their responsibility is to track their benchmark, not season the sauce. However, a manager that purports some strategy that claims to beat the market ought to sit down at the table and take a big gulp, and I’m not talking about a $10,000 investment, which is barely a tip to these guys. If he’s heading for the exit, he probably knows something you don’t (and should). Me, I’m LOTS more interested in investments I actually have money in, although some of them, some of the time, require a Pepto to stomach.
Now let’s take a look at those “investment advisors” who call you up with the latest hot high-commission sales product their firm is pushing—e-r-r-r, considered investment recommendation. I think it’s entirely legit to ask whether they’ve bought the product themselves, and if so, how much or what portion of their investment portfolio is placed in that investment? Of course, it’s always possible that the investment may not be “appropriate” for their personal portfolio, but I’d sure want to know why not. If they’re not willing to take the risk, why should you?
There is one big “but”, however. You don’t want someone who’s made a huge buy, decides to pump you up, then sell his own holdings at the now inflated price. That is, unless you enjoy seeing your “investment advisor” doing a perp walk in a photo in the Wall Street Journal.
You can’t protect yourself against every possible misstep, but these ingredients can go a long way:
1. Know how much you’re paying and how you’re paying it. Nobody works for free. There’s ALWAYS a fee or commission or hourly rate somewhere in EVERY investment.
2. Find out whether the advisor invests in the recommended investment.
3. If it sounds too good to be true, IT IS. This one principle alone would have saved all the Bernie Madoff victims and most of the victims of rip-off mortgage loans.
4. Just because someone’s nice doesn’t mean they’re good. Personal charm of the broker has nothing to do with the worth of the investment.
Check it out before you fork over your money. Bon appétit!