Due Diligence and You

When it comes to selecting investments and advisors, due diligence is your guardian angel.

First, investments. As a firm, how do we screen options in a way that benefits and protects you?

In addition to appraising and scoring literally thousands of mutual funds and ETFs, each year we conduct hundreds of qualitative meetings with product specialists, portfolio managers, economists, strategists, risk managers, and policy analysts.

Why are these standards and practices so valuable?

These meetings are vital because they enable us to cross examine the representatives of the companies who want us to incorporate their funds into our model portfolios (which are comprised of the investments we recommend to clients). These meetings help us to examine the processes, risks, company structures (and their philosophies), and to analyze the varying exposures of different investment strategies. They also enable us to examine things like index construction, thematic investing, top-down investing, and quantitative and disruptive investing, as well as traditional bottom-up investing.

Our research is the foundation of our philosophical belief that, first, when it comes to investing, if you conduct your due diligence, you enhance your odds of being successful over the long term. Second, the more we learn, the more we understand that when it comes to investing, there is absolutely no silver bullet. (If there were, investors would figure it out and there would cease to be excess returns due to crowding.) And, third, it’s helpful to be exposed to differing points of view: including valuations, growth, diversification, and controlling risk, to help us avoid any biases that could impact our decision-making processes.

Due Diligence and Selecting an Advisor

There are similarities between the processes of selecting funds for portfolios and selecting an advisor to help you build a personalized retirement plan.

While we certainly wouldn’t expect investors to hold 1,000 meetings or interview 50 advisors, the process of evaluating advisors is not only just as important, in some ways it can be nearly as complex.

With that in mind, here are a few things we believe you should consider when either assessing the performance of your current advisor or researching a new one.

Understand how your advisor gets paid.

Some advisors get paid strictly by receiving a commission for the products they sell, while other advisors get paid a fee for the assets they manage.

Here’s the difference:

Commissions are tied to the transaction of a product. Some products not only pay the advisor more than 15% in commissions (that’s your money), you actually have to pay an additional fee if you no longer want your money tied up in their recommendations.

The more an advisor is financially incentivized to sell a particular product, the more cautious you should be. Simply, what are their motivations?

Conversely, advisors who fully or primarily receive compensation via a percentage of the assets they manage are more likely to have their interests aligned with yours. That’s because the more successful you are, the more successful they are.

What services does your advisor offer?

Some individual advisors try to be all things to all people. Your advisor should be up-front about what they can and cannot do. Be wary of financial professionals that infer they are capable of handling sophisticated strategies, but whose infrastructure and support staff are non-existent, or who lack the necessary experience, technology, reach or qualifications to complete or deliver on said tasks.

Work with an advisor that offers full service retirement planning, cash flow analysis, investment management and tax planning, and not one whose only focus is to sell you commission-based insurance products, regardless of whether (or not) those products are the very best choice for you.

Understand how many hats your advisor wears.

In addition to advising clients, some advisors concern themselves with marketing, compliance, ordering trades, and selecting investments, in addition to servicing clients.

Each of these endeavors is a full-time occupation.

You could go to a bank or mega-firm in a strip mall.

Yet, when it comes to your retirement, bigger isn’t likely better. That’s because not only are you likely to get lost in the shuffle at a Wall Street bank, the “advisor” turnover is high, and their compensation is probably tied to selling you products that their employer manufacturers.

We believe that a highly-personalized, comprehensive financial planning approach, where individually-trained professionals inside the firm oversee the marketing and the compliance, the execution of trades, the selection of investments, and the “servicing” of clients, we believe that model generally serves the needs of the individual investor best.

What are you really paying for?

Some advisors charge the client for every trade. In fact, some advisors deliberately select higher-expense mutual funds in-order-to-get paid what are called 12b-1 fees.

These are fees, embedded in many mutual funds, that you may never even realize you’ve been charged.

We believe that advisors who are paid independent of products and who have an open platform are best positioned to meet the needs of the people they serve.

What are the qualitative aspects of the advisor?

When considering an advisor, you should ask yourself:

  • How well does he or she listen to me?
  • How aware are they of my real concerns?
  • Does the advisor ask enough questions to gather a complete mosaic of my financial situation?
  • Does the advisor tell me what I need to hear (no matter how hard), or what I want to hear?

Summary

When it comes to investment selection, we conduct due diligence that we believe serves the interests of our clients.

In that vein, if you methodically ask these and other in-depth questions, the chances are greater that you will find an advisor who is not only looking out for your best interests, but who is the most qualified, and the most motivated, to help you meet your financial and retirement goals.


Past performance does not guarantee future results. Any stock market transaction can result in either profit or loss. Additionally, the commentary should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the provided information. Market and economic conditions could change in the future, producing materially different returns. Investment strategies may be subject to various types of risk of loss including, but not limited to, market risk, credit risk, interest rate risk, inflation risk, currency risk and political risk.
This commentary has been prepared solely for informational purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or instrument or to participate in any particular trading strategy or an offer of investment advisory services. Investment advisory and management services are offered only pursuant to a written Investment Advisory Agreement, which investors are urged to read and consider carefully in determining whether such agreement is suitable for their individual needs and circumstances.
Hanson McClain Advisors and its affiliates and its employees may have positions in and may effect transactions in securities and instruments mentioned in these profiles and reports. Some of the investments discussed or recommended may be unsuitable for certain investors depending on their specific investment objectives and financial position.
Hanson McClain Advisors is an SEC-registered investment advisor that provides advisory services for discretionary individually managed accounts. To request a copy of Hanson McClain Advisors’ current Form ADV Part 2, please call our Compliance department at 916-482-2196 or via email at compliance@hansonmcclain.com.
September 21, 2018

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