Investment Advisors Should Eat Their Own Cooking

From Covestor:

Your search for an investment adviser should start with ones who put their money where their mouths are, says Charles Sizemore, portfolio manager on the Covestor platform.

Ask yourself: Why wouldn’t a manager invest in the portfolio they are managing? And if they won’t, why should you?

”You care more about it when you have your own money on the line,” Sizemore says of investment advisers, in our latest online hangout. “It’s just human nature.”

Looking for managers with skin in the game, so to speak, may even have a tie to investment performance. According to Morningstar research, funds run by managers who had invested $1 million or more in the funds they managed outperformed 58% of their peers over the 5-year period ended in July 2009.

The Morningstar report did not attempt to say that levels of manager investment can predict future performance, however.

According to Sizemore, the benefit of having managers invest in their own strategies also applies to financial advisers who run separate accounts for clients. He says it’s a sign of confidence in the manager’s abilities.

“You want to know that your financial adviser or your money manager is aligned with you and that you have the same interests,” he says.

On a related subject, Sizemore says that it’s important to find an adviser that is only paid based on the assets being managed or on the performance of the assets under management, and to avoid ones that are paid based on commission.

“If they are earning their pay based on a commission sale, then they are incentivized to sell what pays the highest commission,” Sizemore says. That’s not to say that all brokers are crooks, but as human beings, we tend to do what we are incentivized to do.”

Rounding out his top traits of financial advisers, he says to look for one with a clear and easy-to-understand investment process.

“Any financial adviser or money manager should be able to explain what they are doing and why… . You need to see thought and a process behind their moves.”

This material represents statements made live on July 17, 2013.  All opinions included in this material are as of July 17, 2013 and are subject to change.  The opinions and views expressed herein are of the portfolio manager and may differ from other managers, or the firm as a whole.  All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance does not guarantee future results.

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