Selecting the right investment manager is crucial for investors to achieve their financial goals. With the variety of investment managers available, it can be challenging for investors to evaluate and choose the most suitable one. By asking the right questions during the selection process, investors can better assess the investment manager’s skills, experience, performance track record, fees and overall fit.
Questions about investment philosophy and process
Understanding the investment manager’s philosophy provides insights into their beliefs, strategies and decision-making. Key questions include: What is your investment philosophy? This helps gauge if the manager’s approach aligns with your investment objectives and risk tolerance. What is your investment process? The manager should have a systematic process for researching, selecting and monitoring investments. Asking how they construct portfolios and manage risks allows you to assess if the process is sound.
Questions about past performance
While past performance is no guarantee of future results, it offers an historical record to evaluate. Ask questions like: What is your historical performance over 3, 5 and 10 years? Compare returns to appropriate benchmarks. Returns should be evaluated on both an absolute and risk-adjusted basis using metrics like the Sharpe ratio. How have you performed in different market environments? Look for consistent performance across market cycles. What is the composition of your current portfolios? Understand where risks are being taken and how the manager balances asset classes.
Questions about fees and costs
Fees directly impact net investment returns, so it is vital to understand fee structures. Key questions cover: What are your management fees? Other fees? These should be reasonable given the strategies employed and services provided. Do you receive any third party compensation? Kickbacks or soft dollar arrangements can increase costs. Fee-based vs commission-based? Fee-based is better for minimizing conflicts of interest.
Questions about client services
Understand the client experience offered by asking: How often is performance reporting provided? Look for regular, detailed reporting. How responsive is your team? Expect timely and insightful communications. What are your minimum investment amounts? Account minimums vary widely across firms. How customized is your advice? Better firms tailor services to needs.
Asking insightful questions enables investors to select investment managers best aligned to their unique requirements and goals. Key areas to address include philosophy, process, performance, fees and client service.