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May 18, 2011


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This is a very good list of questions.

5. Could you teach me to implement your investment strategy and let me do it on my own?

Disagree - the FA can explain his investment strategy, but why would he/she ever teach you the details behind that strategy? That is not a value-added question for either of you.

You, as a novice investor, could never replicate that same strategy, that is why you hire an FA in the first place.

Actually, as I write this, I have another thought. Is this post referring more to investment managers? What do you see is the difference between a FA and an investment manager?

Over the years I have taught myself how to become a very successful investor and it isn't easy and isn't for everyone.

I have these words of wisdom in full view on my desk:

"Good judgment comes from experience,
and experience ..............
well that comes from poor judgment"

You basically have to pay your tuition at Wall St. University and learn from your mistakes.

#8 is a key indicator for me in dealing with people. People who have a need to show evidence of success will often do anything necessary to maintain that appearance. Now if they truly are successful they might not need to do anything shady to continue the appearance, but how would you know? I mean after all, they appear successful right.

CNBC's American greed recounts the stories of countless money manager and ponzi scheme rip off artists. There is not one of them who was not attempting to live a lavish lifestyle while doing it. What is the point of committing fraud if you can't enjoy it.

I have also personally seen people chase the trappings of wealth. The desire to look successful and rub elbows with those who are is a huge motivating factor.

When watching American Greed, all the people who get taken by the crooks always talk about how the person seemed so successful so they never would have suspected anything. I must be idiosyncratic because whenever I see someone spreading money like cream cheese on a bagel I have buzzers and repulsion warning signals going off in my head, my gut, and all the way down to my little toe.

To me someone who is displaying success is putting on a show and most shows are fiction. If I wanted to see a show I would go to the theater. When it comes to my money, I want boring and bland. No one tries to fake that.

I or one like question #5. The evidence as I see it (along with Warren Buffett, Burton Malkiel, Dan Solin, Charles Ellis and many others) is that a really easy investment system involving well diversified, low cost exchange traded funds beats 80% of the professional managers out there on a longer term basis after all costs are accounted for. It is why the country's largest pension funds have so much money indexed.
The system can be learned by reading any number of excellent books including "the Elements of Investing" by Malkiel and Ellis.
A weekend reading the book along with some time spent with an investment professional who believes in the approach is doable.
Questions 1 and 3 are also excellent IMHO.

As an investment adviser myself, I really love these questions and think they will definitely serve those who are seeking out an investment adviser.

I'm not sure that a good investment strategy necessarily can be replicated by a retail investor. Understood, yes, but replication might involve complicated research and proprietary software tools not accessible to the retail investor.

Derrik Hubbard, CFP


I have a different take on the whole issue of whether or not a "good" investment strategy can be replicated by a retail investor. In my opinion. most good investment strategies are pretty darn simple: invest X% in this asset class, Y% in that asset class, and rebalance every Z months. Sure you can make some refinements around the edges. Do I rebalance every 4 months or every 12 months? Do I invest 5% in emerging markets or 7.5%? However, the basic premise is something that anybody can do through one of the big mutual fund companies. There are plenty of freely available examples of reasonble asset allocations for various risk tolerances and life stages.

The area where people need help isn't the technical aspects of investing; it's the psychological aspects. People start off with a good plan but after the first market correction, they panic. They throw their plan out the window and buy and sell in a panic. They end up selling their declining assets and buying overpriced ones, which is the exact opposite of what you should be doing but it is exactly what most people do.

This is where a financial advisor earns their money in my opinion. They don't earn their money with "complicated research and proprietary software tools". They earn their money by helping their clients to stay the course when times are bad (and when times are good and people are thinking of moving all of their money into a hot bubble stock of the month).

How about asking this question to the prospective financial advisor? "Could you please show me your complete track record for each of the last 5 years?"

I have never used a financial advisor, and never will, but that would be my very first question. My second question would be "Please show me your complete fee structure?"

Question #1 of 10 is a No Brainer unless you want to be a Bernard Madoff type of victim.

Another question could be "Do you track your own net worth? Can you show me your net worth history over the past X years?" I don't know if many advisors would be willing to share this info, of course. But I would personally be much more likely to pay for financial advice from someone who was already very successful with their own finances.

When speaking with the financial professionals that you are considering,you should treat the initial conversation as a mutual interview. The professional should ask you about your goals, your current financial situation, your plans for the future and your personality as it relates to saving and investing. By learning about you, the professional can begin to formulate an appropriate investing strategy. At the same time, you should be prepared to ask questions that will allow you to judge the professional's ability to manage your finances appropriately.

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