What are the most effective questions to ask when looking for a competent money manager? -- Stephanie, San Jose, Calif.
Asking a few important questions of a prospective money manager is a great first step, one that can mean the difference between meeting or falling short of your financial goals.
Indeed, a money manager can play an incredibly important role. Not only do some serve as financial planners, helping you to save for certain goals -- such as your kid's college or retirement -- but their main goal is to make investment decisions that directly affect your ability to meet those goals.
That's why it's so important that you find a person who is the right fit for you. In fact, most experts recommend that you interview several managers before making a commitment. Here are some important questions to ask:
How will you go about investing my money?
While some money managers will focus on your particular goals and circumstances, others may use the same basic market strategy or philosophy for all of their clients, said Eleanor Blayney, a consumer advocate at the CFP Board, a nonprofit organization that sets standards for certified financial planners. So it's important to find out whether your stock market investments will be tailored to your particular savings targets and time horizons.
"The distinction is: 'Are my financial circumstances taken into account or are you managing money by a specific overall objective?'," she said.
How do you get paid?
It's essential you understand how much money the arrangement with your money manager will cost you.
Money managers are typically paid through client fees, which are usually based on a percentage of your total managed assets. Even a 1% management fee, which is pretty standard, can add up to thousands of dollars of year.
There may be other fees as well though, so it's a good idea to ask for a copy of their ADV form, which should disclose all fee details. Investors should be wary of any manager who does not freely provide the form when requested. It can also be viewed in the SEC's Investment Adviser Public Disclosure database.
In addition to fees, the form will also contain information about any disciplinary actions or conflicts of interest.
What are your other clients like?
You don't want to be someone's smallest or biggest client in terms of available assets, Blayney said. Instead, an ideal money manager will have experience helping people with similar financial circumstances and goals.
How will you add value?
Few money managers consistently outperform much cheaper index funds, especially once fees are taken into account.
If you're paying a money manager, you're likely looking for someone who is going to do more than you feel you could do on your own. So be sure to ask them: How will they do that? How will they help you manage risk? Will they change your investments if your goals are in jeopardy?
"I think it's important to understand at what point do they have a sell discipline, as well as a buy discipline," Blayney said.
The right answer will match your own level of risk tolerance, she said.
Asking about past performance is also important, but beware of anyone claiming to be able to beat the market year after year. If it sounds too good to be true, it probably is.