-Know the experience level of the firm's professionals.
-Avoid managers who push costly proprietary products over lower fees.
-Check SEC records on any past industry sanctions.
-Ask for specific, concrete examples of a firm's ethical practices.
-Find as much as possible about client-appropriate, risk-adjusted performance.
Institutional investors shopping for an investment manager can get those answers more easily than individual investors, to be sure. Asking friends for their recommendations or asking for references from other clients is one way average investors can get information in picking an investment professional. And even if they have little knowledge in advance, once they become clients they should keep watching the guidelines listed above. If advisors are failing on one or more, it might be time to shop around. Don't wait for a bad situation to turn into financial disaster.
Experts say one of the biggest signals of problems is an investment professional who cannot clearly communicate to a client about what decisions are made and why. "It's about the relationship," says the New Jersey financial advisor. "Performance matters but that really depends on people's risk levels. It's got to be appropriate. And it needs to be talked about openly."
The CFA Investor Trust Survey is the first ever so there are no prior year comparisons. But it was done in partnership with Edelman, whose 13 years of survey data from its Edelman Trust Barometer across industries shows rising "emphasis placed on individuals to behave in ways that build trust and protect reputation." Edelman says this holds true for the investment management industry as well."
None of the results show that money does not matter, of course. "Getting good results is entry level. Nobody wants to pay someone who gets crappy results," says Schacht. But 35 percent said the most important trait of an investment manager is making their clients' interests the top priority, and only 17 percent put maximizing return as the most critical requirement. Surprisingly the integrity issue was five times as important as fees, a top issue for only 7 percent of those in the survey, which included 1,600 retail an 500 institutional investors.
Does it mean people will pay for integrity and risk management? "It's definitely an opportunity for the industry if they can address the issue of character convincingly," says Schacht. "Everybody is looking for an honest broker."