Protecting your interest is critical to the success of retirement planning. Think of a real-estate transaction where three out of the four parties want a high price. The seller and both agents all make more money with a higher price, while the buyer wants the lowest price. In the case of retirement investing, external interests are at play that may conflict with your goals, and decrease your returns. This holds true even if your advisor has your best interests in mind.
Your advisor is being constantly bombarded by promotions for new funds, from his company, from various publications, and from other outside interests. One of the most common sales methods managed funds use is to send out ‘traveling subject-matter expert’ who go on road shows to make complicated presentations hoping to influence investment decisions. The presentations tout a differentiator to set themselves apart from the crowd. “We’ve done extensive analytic research, and developed our proprietary sector-specific algorithm that has outperformed the S&P 500 by 20 basis points over the last 5 years”. While the statement may be true at face value, we know that it’s unlikely that future performance will follow the past. There is always the fund load to consider, as it may eat into much of the gain. If your advisor is taken in by the salesperson’s presentation, you can end up with an untrusted or underperforming fund in your portfolio.
So when your advisor presents a new fund to you, be sure to ask him or her how they learned about it, and then do your own research before diving in. Here are some common questions:
- What is the investment term?
- Does the fund have the right amount of risk for your portfolio?
- What is the load?
- Is the fund disciplined?
- How long has it been in existence?
- What events would trigger your advisor to sell?