The chill in the air last year came from the stock market crash. This year, it might be a bit warmer as the market has rebounded. But that's no reason to be lax in reviewing your money manager. Just because the portfolio isn't plummeting to the bottom anymore doesn't mean money managers are doing a good job. You need to review many other factors to try to protect your hard-earned money.
Money managers come in different shapes and sizes. In this case, what is being called a "money manager" is anyone who handles your money. That could be a stockbroker, financial planner or registered investment adviser, or even the manager of the mutual funds you own. While the applicability of the following questions will vary according to your specific situation, the overall question topics apply across the different money management methods.
Questions To Ask Money Managers
1) What were their earnings for the year? Before you worry about you, think about money managers. Put yourself on the other side of the table for a minute and think about their incentives and how that might have impacted you. How much money did they make? How did they make it? Are you okay with that? Did conflicts of interest creep into the equation? Are their earnings commensurate with others doing similar work?
2) Did they do what they said they would do? Start with reviewing what your money manager professional or firm was supposed to be doing for you. There are different approaches, and you can't review how well they have done until you recognize what they should have done, as there is no way to judge performance.
3) Was the goal to beat the S&P 500 by two points? Was it protecting your principal so your maximum loss was limited to some percentage? Whatever they said they would do is the only fair criteria. If they weren't trying to avoid the volatility we saw over the past year, and said they were going to buy and hold for the long term, then you need to judge them based on that, not what you wish they had done. (For related reading, be sure to check out Long-Term Investing: Hot Or Not?)
Update The Background Check
Regulations differ depending on the way your investment professional is registered. If he/she is a broker, then FINRA is the your best option. Search for your broker from more than 850,000 current and former FINRA-registered brokers and 17,000 current and former FINRA-registered brokerage firms.
This is not an exhaustive list of potential regulators. Some states are involved, and sometimes it's paper-based and not on the internet. So if your money manager isn't on either list, don't panic. Just ask where he/she or the firm can be found and how to access the information. While it's unlikely that you will find anything, you might; and that's what a checkup is all about.
Review Money Managers' Strategies
Start with reviewing their investment strategy, as it is your strategy too. Do you understand it? If not, make them explain it. Do they understand it? If not, run for the door and find someone else. Then find out if they stuck to it. If they are trading to beat the market and generate excess returns, did they stick to that or try something else? If the strategy was buy and hold, or sector rotation, or technical analysis, did they stick with it? Then ask, did it work? If not, why not; and why will it get better? If it did work, will it work in the future? (For more on this topic, see Investment Strategies For Volatile Markets.)
Review Their Ongoing Learning – Markets and regulations change all the time. If money managers aren't getting better at what they do, someone else is, and maybe you should be with them. Did they keep up with changes in the law, events and other changes during the year? Did they go to a class or seminar to learn about new things? Are they engaged in their profession, learning and sharing ideas with colleagues that could benefit you?
Review Their Attitude – This may be the most crucial part. Money management is hard, but cutting corners is easy. Simply do less research and make decisions based on less or lower-quality information. Take note if money managers have been lackadaisical in their approach and putting things on autopilot. Are they just as engaged as they were when they gained your account? Do they take your business for granted? Are they doing other things? Is their practice growing or shrinking?
This won't be the most fun you'll have this season, and it may not be fun for money managers at all. But it's important to know what money managers have been up to and keep them on their toes. They should be doing their best for you. If not, you need to know it sooner rather than later.