My 1st Million At 33 – yes, you can do it too

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When you are in a process of finding a money manager or financial advisor, do you know what to expect and ask? Letting other people to manage your money may be one of the most important things that you just want to get it right. Based on my own experiences of talking to more than 5 financial firms, here are things that I suggest you to pay attention to.

Understanding money managers’ strategy and philosophy
Before you give your money to somebody else, make sure you understand what they are doing with it. This is just to be responsible to your own money. You should understand their investing philosophy: value oriented vs growth, conservative vs aggressive, bottom-up through stock selections vs top-down via asset allocation. Most likely you will hear all the “good things” that they will do, employing the best of both worlds. But make sure you force them to take one side. It’s totally contradictory to take both sides. Certainly, there are exceptional time that you may switch your strategy to the opposite way, but there is always a central theme in their strategy. You just can’t be both value and growth investors, nor can you do bottom-up and top-down at the same time. Either bottom-up, and then top-down, or top-down first and then bottom-up. You have to weigh in one strategy higher than the opposite. Anyone trying to tell you “the best of both worlds” is either lying or repeating like a parrot without understanding the investment world. Make sure that their investing philosophy aligns with your goals.
How and what money managers trade
The other important things to ask is how they do trades. Some firms actively trade a lot. The portfolio turnout can be very high. Ask how much of the portfolio is turned over every year. Usually you don’t want a lot of churning, unless the firm can prove itself as a good trader. Some firms are hedge funds or hedge funds-like. They will use put/call options, short positions, and/or margin, possibly gaining more leverage beyond your 1X cash buying power. You must understand what kind of trades they may enter.
How money managers allocate assets
Most firms have some goals in mind for each sector or each class of asset such as bonds and foreign stocks. You should inquire them in details, so that their asset allocation will match with your overall picture. Some firms don’t use bonds at all or just keep a tiny balance in bonds, since their clients most likely will have their own bond portfolio. Some firms are more like total money management solution. They may have a significant portion of money in bonds. Understand how they allocate their assets can help you re-align other assets properly. Preferably, you want some diversification (well, unless you’re so sure of some sectors that you really want or you really don’t want).
Fee structure of the money managers/firms
Almost all firms charge by the percentage of your account balance, as part of their compensation. At 1% fee, if you have $250K, then they will take out $2500 every year for management fee. The fee often ranges from 1% to 2.5% as a percentage of your account asset, plus any trade transaction fees that may be charged to you. Money managers using mutual funds should be charging less than the ones using stocks directly. Using options or even (commodity/forex) futures will probably cost you more. And foreign markets cost more too. But if the account has sufficient percentage of bonds, their fees should be lower because bonds are less volatile and require much less attention. The more sophisticated the strategy is, the higher the fee, but unfortunately NOT necessarily the performance. Some firms lump the trading commissions as part of their percentile fee, but some firms don’t. To give you a point of reference, my current money manager for my stock account charges me 1% + all transaction fees. Do remember that these transaction fees are not like $5 per trade at Izone or $7 at FirsTrade or Scottrade. Their transaction fees are usually at least $12 and can even be as high as $50 per transaction. Some money managers will even charge for their out-performance when it happens. They may charge additional beyond the basic charges when your portfolio return is better than 8% to 12% (it all depends).
How are the new cash/account treated
Paying such high fee, you would wish that your account has individual attention. But often, the amount of attention is probably less than you expect. The best to hope for is that your new account or any new cash added are only employed at the opportune time. However, many firms operate more like a mutual fund, where most of the money from every different investor goes into the same pool of investment, and you simply get a share of the same thing. In that case, it is important to find out whether you’re simply buying another “mutual fund”. When all of you new cash is used to buy into their allocation immediately, it is not very good for you (but much easier for the firm). Since market goes up and down, all of your cash goes into the market in a snapshot, and you don’t get any diversification by sampling the stock market at different points. You would hope that the firm at least attempt to find a more optimal point to put your cash into use for different segments of market. Obviously, the firm will not change their way of doing things. But it is important for you to find this out. If they are not doing any time diversification, at least you can try to do that by infusing new cash into your account at different time points. Or have an agreement with the firm that you want to phase in the minimum amount of cash gradually instead of giving them everything in one snapshot.
Performance and References
This is probably the most basic thing that you should get. You should always get a verifiable performance record if possible. If not, at least you should get some references or investigate the reputation and background of the company. Get the performance number through up and down time in stock market. That can give you some better ideas about how well the money manager or the company manages the money.

Here are some articles that I found on the internet. I suggest to read all of them, even though a large part of them may be repetitive. If you make this far to the end of my post, I assume that you are serious about letting others to manage money for you. Spending another half an hour to read through these is nothing, compared to the amount of the money that you will spend for fee or you may potentially lose.

1. Basic Questions to ask your wealth manager from Rediff
2. Questions to Ask a Financial Advisor from FinancialSense. Most financial advisors in the business do not know how to deal with a secular bear market.
3. Questions You Should Ask About Your Investments, from SEC. This is a standard list that you should have in mind.