Not everyone is a do-it-yourself investor. Some people do not have time to manage their assets; others do not want to, or feel they are not equipped with enough information to do it properly. A financial advisor or investment management service is often a natural next step.
Finding one, however, can be a daunting task. This person — or service, if you are considering a robo-advisor — will take charge of your investments and play a lead role in your financial future. How do you find the right fit for your needs?
Terry Banet is the chief investment officer at SigFig, an investment management firm in San Francisco. Her job includes making investment decisions for clients on a daily basis. How an investment professional goes about choosing the person or service to manage their own investments could serve as a useful guide for investors who are just starting out. Even if you feel you are not a beginner when it comes to investing, following the steps below might prove useful in figuring out your needs — and help you find the professional or service that would best address them.
1. Understand your actual needs. First things first: What kind of advice do you want? Do you just want someone who will manage your investments, or do you want advice on how to structure your entire financial plan? If you want help deciding whether a 529 account is the best way to save for your kids’ college education, or how much life insurance you need, or how to draw up a will that provides for your family’s future, you might be better off spending your money on a good lawyer and choosing low-cost index funds on your own, or going with a low-cost, automated system that will choose those index funds for you.
2. Shop around. Whether you are looking for an individual or an automated system, explore a few options before making a commitment. A lot of people choose an advisor based on a referral. Certainly, a friend’s recommendation is a good sign, but you should not set aside your own judgment. The first person you meet, or the first system you try, might seem great — but the second or third might be even better. Especially if you are new to investing, you should check out a couple of different options so you can compare approaches.
3. Think about risk. Take some time to think through your tolerance for risk on your own. Risk is a complicated, abstract concept, so try thinking about what would keep you up at night. For example, would it bother you if the markets are shaky over the next year, and a year from now, your account is down 5 percent? What if two years pass, and your account is still down 5 percent? Five years from now, if your account is flat, will you be upset?
Look around online for questionnaires that are designed to test your risk tolerance. Take a few of them so you get a feel for the typical allocation your answers suggest. That way, if you get an off-the-wall suggestion, you will recognize it as such. You are not necessarily looking for the same cookie-cutter answer as the allocation you would get anywhere else, but you do want to know an outlier when you see one.
4. Do not be seduced by big numbers. The standard boilerplate language on investment-company advertisements says, “Past performance is no guarantee of future results.” It is legalese, but it is also true. Beating the market is nearly impossible to do consistently. Do not look for the system with the best five-year returns; look for a system you can understand and that you feel comfortable with. If you are looking for an individual advisor, you want someone you can speak openly with and who can explain things in a way that makes sense to you.
One key question to ask any advisor is how tactical or strategic they are. Being “strategic” tends to mean choosing an allocation and sticking with it over the long term. When advisors make “tactical” bets, they move in and out of investments based on their view of what is happening in the market from week to week. Keep in mind that timing the market is very difficult, and research shows that most active managers do not outperform enough to justify their higher fees.
5. Keep an eye on the small numbers because they add up. Fees are one area most individual investors do not pay enough attention to — and that goes beyond the advisor or advisory service’s fee. You need to know how much the advisor or the company takes cost into account when choosing investment products for you. Do they earn commission on anything they might sell you? What kinds of fees would they consider expensive? You cannot control the market, but you can control the fees you pay to access it. Keeping those costs low is the best thing you can do to protect and grow your money.
You do not have to be an investing professional to choose a good advisor. You just have to be prepared, think about what you want and make sure you understand how anyone you are working with is making their money. The investing world has its own language, and it can be intimidating if you are new to it, but the core questions you are considering are pretty simple: What am I saving for, and what kind of help do I need to get there? Let the essentials guide you, and you will be fine.
More from U.S. News
Your 7-Step Checklist to Choosing a Financial Advisor
10 Ways to Build a $1 Million Nest Egg
10 Long-Term Investing Strategies That Work
5 Insider Tips for Choosing a Financial Advisor originally appeared on usnews.com
