Ten questions to ask your financial advisor before handing over your cash
The Bernard Madoff scandal has sent ripples of fear through investors around the world. If the wealthy and well-connected people who put money into Madoff’s fund can be fooled, they ask, what hope is there for the rest of us?
But there are ways in which ordinary investors can help minimise their chances of buying into an unsafe fund. With the help of Justin Urquhart Stewart, of Seven Investment Management, we have put together a list of ten questions that investors should ask their financial advisor before handing over any money.
1) What investments are currently held in the fund?
This should give you a clear idea of the kind of fund the manager is running. If the answer is complete gobbledegook, this may not be the right fund for you.
2) Has the fund got a clear investment strategy?
Again, what you are looking for is clarity. If the advisor cannot explain the strategy clearly, or you cannot understand how the investment works, then leave well alone.
3) How does the fund measure risk and how risky is the fund?
Investors are entitled to know how risky a fund is before putting money into it and to be reassured that the managers have a proper measure of that risk.
4) What are the full costs of investing in the fund?
A really crucial question which may make some advisors and fund managers wriggle. Hedge fund managers in particular can charge performance fees of up to 20 per cent of profits.
5) Does the fund have a published track record and if so what is it?
Another crucial question. While performance data for standard UK-domiciled equity funds is quite easily obtainable, it is more difficult to obtain a clear picture of how hedge funds or offshore funds are performing.
6) How easy is it to get my money out if I want to?
This is a particularly apposite question for property finds or hedge funds - and the answer can sometimes be: not for several months.
7) What is the fund's system - if any- of asset allocation?
A useful check to ensure that the fund manager has a clear sense of direction and is not simply making it up as he or she goes along.
8) Who is the fund manager regulated by?
If the answer is no one then be very wary of investing your hard-earned cash.
9) To what extent am I protected if the fund goes bust?
Again if the answer is not at all or hardly at all, then you should not invest unless you are a truly battle-hardened investor.
10) Who supports the fund team, such as bankers and accontants?
This apparently innocuous question can set danger signs flashing. For example, if the accountancy firm auditing a very large fund is a very small firm, as was the case with Madoff’s fund, then that should set the alarm bells ringing.
Above all, says Mr Urquhart Stewart: "Never forget that if something appears too good to be true - it probably is."
If you do not have a financial advisor and you are investing directly in a fund, do not be afraid to ask the fund manager the very same questions.
To see a video of Mr Urquhart Stewart's top tips to avoid disaster, click here.
Posted by Mark Atherton
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To be perfectly frank, who on earth would trust a financial advisor now, they would have to be crazy!
Posted by: mac Rutherford | 28 Jan 2009 16:20:00
I never deal with IFA's or anything that ends in the word "fund" They all wear pin stripe suits and take a % of their clients money without a guarantee of anything except they will always take their % from your money, even if you lose out.
Posted by: Brian Faulkner | 29 Jan 2009 07:41:23
One thing is your investment adviser, another this is a fund. The current problem is about funds, not investment advisors. Funds have the capacity of using "creative accounting" and/or hiding loses for years. I would like to say this won't be the case from now on, but I thought the same when the Nick Leesson/Barings bomb exploded...
Posted by: JUAN TRUDEN | 29 Jan 2009 20:46:32
As a young man I could not understand how I could pay someone compound interest to invest on my behalf. They get paid no matter if my capital is safe or not; heads they win, tails I loose. I am middle aged now and mostly I have invested in good quality residential property. Stocks: I buy low and sell high in blue chips with a proven track record: so I am buying now. Don't be fazed by the news, do volume averaging. Financial advisor ha! I need them like the pox. The emperor has no clothes and has not had for decades. Its a huge joke.
Posted by: GK | 15 Feb 2009 23:50:51
As someone who runs a small, advisory firm, Capital Asset Management, I would suggest that working with a good quality IFA can be rewarding. Tax planning ideas, acccess to significant discounts on investment manager fees,and generally acting as a financial 'coach' with regular review meetings can be very helpful. If concerned over fees, agree a 'success fee' model - that you only pay if certain objectives are met.
Residential property has been a good place to be over the last 10 years - but as recent events indicate, placing all one's eggs in the same basket can be a high risk strategy.
Posted by: Alan Smith | 23 Feb 2009 11:28:42
I would like to add my comment to this discussion. To all the investors wondering what the next move is on wall st I can only speculate by my own experiences stay away from the market for at least the next 5 yrs. The U.S is so much in debt and this current passing of the stimulus package makes me wonder who will pay for all this and the conclusion to this recession is inflation which will hit an all time high in the next decade or so and this stock market will get hit again and never really rebound the way it should I would be sketical on any investments at this point unless they are totally risk free and your money is guaranteed. In my opinion we have at least 10yrs before we see any real change in this market and real estate will sink even more in the next year or so and I cannot see any large movement in the housing sector for a long time.
Brace yourselves for a weaker dollar which will ultimately gives us inflation and higher interest rates.
Posted by: Enio Marini Connecticut | 13 Mar 2009 15:15:05
When I was leaving the UK last year, I went to see an IFA as I was thinking about drip feeding some of my capital into UK investments over the long term (10 to 15 years)
When the IFA saw that I had £420K in capital, he said within 3 minutes that I should put £360K of that into an offshore bond run by ROYAL SKANDIA and invested into KSF on the Isle of Man.
Those bonds attract a nice fat commission for such easy work and we all know where KSF's money from the IOM branch went don't we?
Thank God that I stuck to using my own brain and kept my dosh in currencies and deposits in far safer places. My money has actually grown well because of weak Sterling
Posted by: Peter Rainsford | 11 Apr 2009 00:35:58
How is it that Madoff is being pilloried when Governments run the biggest Ponzi Scheme in the world. You invest £100 in government bonds and in ten years receive £400 back. The extra £300 (interest) is paid for by the government issuing more bonds.
This cycle goes on and on. It's the way the USA got lumbered with its trillions of dollars of debt. Just like any ponzi scheme, Governments
need a constant flow of new suckers (read taxpayers) to fund the ever increasing cost of redeeming due bonds. The only way to fund it is for the government to borrow more money by way of the same bonds. A case of do as I say and not as I do?
Posted by: RB | 14 Apr 2009 22:34:25
"What investments are currently held in the fund?
Has the fund got a clear investment strategy?"
Didn't anyone as Madoff these questions? My understanding is that they did, and were told lies.
It's no use asking questions. You need to be able to check the answers.
Posted by: Maria B | 19 Apr 2009 18:00:15