Tuesday, May 13, 2014

Five Questions to Ask Your Advisor

Good advice is worth it's weight in gold. There is no doubt about that but your advisor can't do all the work alone. You still need to be involved and asking questions about the person managing your investment portfolio and about the advice they are offering.

We recently came across an article in the Financial Post, written by Martin Pelletier. 

In the article, Pelletier talks about FIVE questions you should be asking your advisor to protect your portfolio.

1. How are they being compensated? 

Are they being paid by an investment firm or do they charge a flat fee no matter the investment?

2. Are they selling near-term performance? 

Martin Pelletier says a downside to a commission-based compensation structure is that advisors will focus on what is easiest to sell and that often means those funds with the strongest recent performance.

3. Are they offering near-term predictions? 

Investors are often comforted by near-term predictions. Pelletier suggests advisors will often seek out economists, market strategists and stock analysts who provide positive near-term forecasts. The problem is that no one, even the experts, can predict near-term moves in the market. 

4. What are they doing to manage risk? 

Pelletier points out that the problem with trying to beat the market is that you end up taking on more risk. Of course that in the end could cause more harm than good. Pelletier suggests you ask your advisor for the  historical standard deviation and then divide it into the specific return generated less a risk-free rate such as the current 90-day T-bill rate. That equation will help you figure out how much return was achieved per unit of risk taken.

5. How have they positioned your portfolio in the past? 

In the article, Pelletier suggests you keep a logbook of your portfolio. It is helpful to know what is happening so that you can review things, like the timing of your purchases and sales, with your advisor.

For a full look at the article, check it out HERE in the Financial Post

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