Ask The Expert: John Odell, CFP of Arroyo Investment Group Capital Research + Consulting
Q. I am searching for an investment advisor. What should I be looking for?
The first thing I want to see is a track record. And I want to see a track record adhering to highest industry standards. The highest standards in our industry are Global Investment Performance Standards or GIPS®. Only about 1,500 firms in the world adhere to GIPS®. By itself, this eliminates most investment advisors from your search. GIPS® accurately displays an advisor’s track record, measures their track record against a market index, measures risk and shows dispersion. Dispersion is the range of investment returns. You might meet an advisor who has an average return of 10%, but their dispersion is plus or minus 10%. That means their accounts gained anywhere from 0 to 20%. Not good. The lower the dispersion the better. Simply, if your investment advisor doesn’t adhere to GIPS®, find one that does. A firm claiming GIPS® adherence greatly differentiates themselves from every other investment advisor that doesn’t. A firm claiming GIPS® adherence with a great track record and low dispersion is a Hall of Famer. You’ll find that most investment advisors don’t even know what GIPS® is. I would stay clear of those advisors. And it’s easy to find the firms that adhere to GIPS® on the GIPS® website. Why would anyone ever invest their money with an advisor that doesn’t adhere to the highest industry standards?
Q. What other questions should I ask?
I want to know who holds or is the custodian of my money. It better not be the investment advisor. Remember Bernie Madoff? So many of these custodians had to be bailed out by the government during the financial crisis of 2008. I want my money with a custodian with a strong balance sheet and clean track record that is not associated with the investment advisor. Sleeping well at night is important to me. Investing in the markets is difficult enough. I don’t want to worry about someone stealing my money. Also, does the investment advisor hold any special degrees such as being a CFP® or CFA®. These degrees take years to obtain and show a level of effort not only to gain the certification but to retain them as they require ongoing education.
Q. What’s the difference between a broker and a registered investment advisor?
The main difference for me is that a broker has no fiduciary obligation other than to recommend an investment that is suitable. That doesn’t cut it for me. I want someone who always has to act in my best interest and that is a registered investment advisor.
Q. What else should I watch out for?
I would stay clear of investment advisors that are small shops picking stocks and bonds. There is no way that they can cover all the countries and companies in the world adequately. This requires huge amounts of time and resources. I want to work with investment advisors that have their feet on the ground around the world speaking all the languages. I want to work with people who know everyone and everything at a company that they are investing in. Knowledge is power.
Q. Anything else?
Yes, another question to ask is an investment advisor’s sell discipline. A consistent sell discipline is one of the most important facets of investing. I have found that most firms do not have one or don’t follow one that they claim to use. An investment advisor lacking a consistent sell discipline will disappoint you sooner or later.
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