An old friend recently came into a nest egg and asked me if I could recommend someone to serve as a financial advisor.  I honestly can’t.  Beth and I manager our own investments so we don’t have much experience working with outside advisors.  I did provide the friend; however, with the following guideposts:

(1) Your first question should always be, “Are you a fiduciary?”  If the answer is anything other than an unambiguous, “Yes!” then you should look elsewhere.  You want to pay your advisor a fee to advise you.  There are those who will offer free advice.  That’s a trap.  They are getting paid by the funds that they recommend to steer clients to them.

A fiduciary who is paid only by you is required to put your interests above their own.  It may seem unpleasant to write them a check for their advice, but everyone who provides a service has to earn a living and it is far, far cheaper in the long run to write that check than to be steered into funds earn subpar returns.

(2) Once you have that unambiguous Yes!, double-check by asking, “So all of your compensation comes from me and not from any other source?”  Again, you want an unambiguous, “Yes!”

(3) Once you have two unambiguous Yeses!, go ahead and spend some time talking to them about your financial situation.  A good financial advisor will have a lot of good tips, not just on how to invest, but also how to organize your finances in a tax efficient way, manage debt and spending, etc.  Many people end up saving more than enough through the tax and spending advice to cover the financial advisor’s fee and have money left over afterward.

(4) A good investment advisor is going to recommend that you buy low cost index funds.  I have a strong bias toward Vanguard mutual funds.  Vanguard is a co-op that is owned by its customers.  It’s founder, Jack Bogle, was a stock broker who pioneered the idea of index investing because he was tired of seeing Wall Street rip-off his clients through mutual funds that charged high fees and delivered terrible returns.

Many folks like to express their moral or ethical convictions through the investments that they choose. Vanguard has a number of low-cost socially responsible index funds.  There are other providers of socially responsible index funds as well.  The key thing is to look at the management fee charged by the fund.  While returns bounce around a lot from year to year, over the long-term, the best predictor of fund returns is the fee charged by managers.  Low-fee funds out perform high-fee funds.

(5) I strongly advise everyone to avoid actively managed funds in favor of index funds.  Having said that, a significant number people have a problem psychologically with sitting back and accepting the return that the market provides through index investing.  Even though they know that active managers almost always underperform index funds over the long run, they need a sense that someone is “minding the store.”  So.  If you are one of those people, that’s fine.  I won’t criticize, but I would strongly urge you to use one of Vanguard’s actively managed funds (they provide those too, not just index funds).  I have a great deal of faith in Vanguard’s integrity, honesty, and the rigorous approach that they bring to investing.

(6) A moment of sexism.  If you go the actively managed route, I would also strongly urge you to find a fund that is managed by a woman.  There aren’t that many funds that are managed by women, but there’s a lot of research that shows that funds managed by women tend have higher returns per unit of risk and fewer losses in bear markets.

We could speculate why that is.  I don’t know the answer, but I suspect that women in finance just have to be way, way better than their male peers to get that job at the top.  Unless you’re a Warren-Buffet-caliber fund manager, it just isn’t going to happen for a woman who is average or only a little bit better than average.  So you might as well make the sexism work for you and put your money with someone who had to be twice as good as everyone else to get where she is.

http://time.com/money/3936521/mutual-fund-managers-women/

http://post.nyssa.org/nyssa-news/2010/04/outsiders-and-outperformers-women-in-fund-management.html

That’s a lot to think about, but hopefully it will give you a start.