How to Choose an Investment Advisor

It is one thing to invest your first $10,000 and another to successfully invest and manage more substantial amounts of money. First of all, when you first start out investing it is often more important to get you financial house in order than pick the right stocks! But, now what do you do with an inheritance of a quarter of a million or more. Or what if you have sold a successful business for tens of millions of dollars? At this point you are thinking that you need some sound advice about how to invest your money. This brings us to how to choose an investment advisor.

How to Choose an Investment Advisor: What Do You Really Need?

Families with huge fortunes are concerned about preserving their wealth from one generation to another. There are various financial strategies to help avoid losing money to estate taxes with each generation. But regarding year by year investments, the point is to first stay ahead of the corrosive effects of inflation and then generate a predictable yearly return.

Above all the goal is to avoid losing everything that great grandpa built and passed on! And a big part of any long term strategy is to avoid having the cost of managing your funds eat away at your return on investment!

How to choose an investment advisor starts with deciding, in general terms, what you need. Are you are happy with an absolutely guaranteed return year after year? If that is the case you may simply want to buy US Treasuries and then ladders of CD’s at several banks. If that sort of absolute security is your goal you do not need to pay someone a fee to manage your money!

How to Choose an Investment Advisor: Brokers, Mutual Funds and Fiduciary Responsibility

In Richard Reis offers advice about this issue and says to be skeptical of financial advisors.

There are over 200 (!!) designations for financial advisors (e.g.: “wealth managers”, “investment consultants”, “financial consultants”, etc.)

According to Tricia O. Rothschild (Morningstar’s CPO), there are something like 310,000 financial advisors in the U.S. now!

He makes the point that if you are going to hand over control of your investments to someone you need to trust them. He uses the Bernie Madoff pyramid scam as an example.

But, avoiding a crook is not the only issue. Fees and commissions can kill you. Mr. Reis notes that Mutual Funds commonly do not beat the market even before they charge you money to manage your funds. The big issue with investment advisors is that all too often they are stock brokers in disguise. They take your funds and charge a small fee. Then they churn your account. This means they repeatedly trade stocks. And every transaction makes money for them and reduces your account.

How to Choose an Investment Advisor: Put Your Money in an ETF and Don’t Pay for Advice

The sad fact is that many money managers fail to beat the S&P 500 year after year. How to choose an investment advisor for many is get some onetime advice and then invest on your own. A viable approach to investing large sums money and not having the fees kill you is to invest in exchange traded funds.

Excellent reasons to use exchange traded funds include low expense ratios, tax efficiency, automatic diversification, and ease of entry and exit equal to stock investing. Investors may choose investing with exchange traded funds and avoid mutual funds. ETFs often outperform mutual funds and they are cheaper to enter and leave. Additionally, investors can pick ETFs that track various sectors instead of the broader market or international indexes specific to countries or regions.

Interestingly, Warren Buffett often suggests exchange traded funds as an investment choice for long term investors.

If you do choose an investment advisor ask for references, demand to see long term positive results, and demand to see each and every fee and commission.

How to Choose an Investment Advisor PPT

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