Market Moves

Investment Advisor

Investment Manager Selection Criteria


Over the years of working with different types of clients, I’ve realized that they all want to work with an advisor who possesses certain qualities.   The following criteria are the qualities that a good investment manager should have.

Be accessible.  You may be a fan of voicemail but eventually you want to speak to a real person and you want to speak to someone who knows you.  I pay good money to my accountant, so when I have a question or concern, I speak to my accountant, not his clerk or receptionist. 

Tell the truth.  Do your candidates have answers to every question?  Are they truthful about what they know and more importantly, what they do not know?   Will they tell you what you need to know early on, so you won’t be unpleasantly surprised down the road?

Be knowledgeable about financial evaluation.  If a manager professes to know about investing and the market, go hear them speak or read some articles or analyses they have written.  Does what they say make sense?  Do they speak in English or financial gibberish?

Have a consistent, understandable philosophy.  The best investors in the country, people such as Peter Lynch or Warren Buffet, may have different investment philosophies.  Lynch, author of several books on investing and former manager of the Fidelity Magellan Fund, looks for undervalued growth opportunities.  Buffet, of Berkshire Hathaway fame, looks for value-oriented investments with a strong franchise.  While they have different philosophies, they share one critical ingredient: whatever their philosophy, they never detour from it.  They are disciplined in sticking to what they know best. 

Have a system of monitoring and reviewing portfolios.  The advisor should have a formal and consistent schedule for reviewing your portfolio.  One of the chief deficiencies of a stock broker or commission based advisor is that they are product-oriented and not portfolio-oriented.  They look at the investment instrument rather than the balance of the total portfolio.  Lack of balance can provide a nice bounce if a stock gets good press.  But the bounce can end in free fall when the headlines are negative.

Be reasonably priced.  The advisor’s fees should be fair to both the client and the advisor.  The SEC does not regulate how much an advisor can charge.  The SEC only specifies that the fee schedule be stated to the client.  This means that the advisor can charge whatever a client is willing to pay.

Be in the growth phase of their career.  Do you want a surgeon who is youthful (but not inexperienced), dynamic, excited about his or her profession, always learning new things and sharing his or her knowledge with others?  Or someone who is thinking about retirement, slowing down his or her practice, and not always keeping up with the latest procedure or technique?  If you want the latter, you might as well put your money under the mattress, because an investment manager needs to have all the energy of a surgeon, if not more. 

Have an exceptionally clear view of reality.  This may be the most important criterion of all.  We have heard that in the real estate market, everyone is a genius when the market is going up.  This is true with other investments.  But it takes realism to recognize that elevators go in two directions.  And knowing when to get off is as important as knowing when to get on.

Categories: General

2 Responses

  1. Eric Paulson says:

    I agree that an investment advisor using actively managed funds can be expensive. The “all-in” cost could in the neighborhood of 2% to 3% as you state. When using an advisor who actively manages a portfolio of stocks and bonds, however, you pay for just the management without the underlying fees for the investment vehicles used by the advisor. So, to keep costs down, try to find an advisor who manages individual stocks and bonds, and not expensive mutual funds or ETFs. This way, the annual management fees should be less.

  2. Coz says:

    What is fair? What is reasonable? The total cost of investing with an investment advisor seems too high to me, especially when they are using actively managed mutual funds. The total costs are easily over 2% per year and over 3% per year. 2 to 3% per year over 30 or 40 years can cut an investment portfolio in half from where it would be if an index fund approach was used.