BrilliantWithMoney

There are many places to get investment advice.

You might read books, listen to the experts on the radio or chat to your buddy on the golf course. The personal finance editor of your weekend paper could have a valid opinion or your accountant might steer you in a certain direction.

Of course none of this is really investment advice. The sources described above would be better described as information or possibly guidance.

Investment advice can only come from a suitably qualified and authorised individual who fully understands your financial goals and objectives before making specific recommendations.

Assuming this is the sort of investment advice you are getting (or plan to get in the future) how can you know if it is any good?

What separates excellent investment advice from the mediocre, rubbish or downright dangerous?

Here are five important questions you can ask your investment adviser to find out if what they have on offer is any good. These questions are equally as valid if you are engaging with a new adviser or if you want to put your existing adviser through their paces.

So, grab a notepad and pen, pick up the phone (or arrange a meeting) and pose the following questions.

1 – What is your investment advice process?

The delivery of consistently good investment advice requires the application of a robust investment advice process. Without such a process, the advice you receive will be subject to the whims of your adviser on that particular day.

The existence of such a process reduces the risk that you will be exposed to the latest investment fad, simply because it is new, hip and trendy on the day you seek advice.

Receiving investment advice from an adviser working to a robust advice process does not mean the outcome from the process will be generic or any less valuable. In fact, the outcome from the process should differ for every investor. It is the process itself that should be rigid, to ensure that the way in which investment advice is delivered is entirely consistent.

2 – What is your investment philosophy?

Your investment adviser should have a written investment philosophy. This document sums up his or her beliefs about investing money. It should be a set of investment rules about which your adviser feels passionately.

There are plenty of differing views when it comes to investing money. Some advisers will claim certain approaches are superior to others. There are usually strong counter-arguments to every academically ‘proven’ approach towards investing money.

What really matters is that your investment adviser has decided in their own mind to which views they subscribe and they are prepared to share these with their clients.

3 – How will you assess my attitude towards investment risk, reward and volatility?

Getting this right is a very important part of delivering suitable investment advice. Tolerance to risk can be very subjective, so a thorough assessment is essential.

This means much more than your adviser asking you to point at your risk level on a scale of one to something. Risk assessment should involve a combination of structured questioning and more general discussions about what you are trying to achieve, your experiences and views of the world.

You might also have a different risk profile for different financial objectives. Your adviser should cater for this as well.

We still see too many investors who have been pigeon-holed into a narrow risk definition. Once established, ask your investment adviser to describe your risk profile back to you, to ensure understanding. Always get a detailed description of your risk profile in writing for future reference.

4 – What resources do you have to enable you to deliver suitable investment advice?

The consistent delivery of excellent investment advice requires substantial resources. It cannot happen as a result of one man sitting in his office reading a copy of the FT.

Ask your investment adviser to describe the investment research software to which they subscribe and how they use it. Your investment adviser should be paying for professional research tools and not simply looking at the same data you can get for free online.

Find out about the other people involved behind the scenes in the investment advice process. Ask questions about their experience, qualifications and role in the construction of advice.

5 – Once you deliver investment advice, how do you keep it under review to ensure it remains suitable?

The worst type of investment advice is delivered once and then abandoned. Excellent investments need regular reviews, conducted at least annually. These reviews are the opportunity to rebalance the asset allocation of your portfolio, manage risk levels, replace underperforming fund managers and make sure you remain on track.

If you implement investment advice with your adviser, there is a good chance you will be paying for ongoing reviews through the annual management charge you pay, as a part of this charge goes to the investment adviser each year. Ask what type of ongoing reviews you will receive, the format of these reviews and (importantly) when you should expect to receive them.

What next?

With these five questions you should be able to get under the skin of your IFA, stockbroker or discretionary fund manager. Their answers to these questions will quickly reveal their competence (or lack of it!), helping you to make the right decision about where you get your investment advice in the future.

Martin Bamford is Site Editor of BrilliantWithMoney and Managing Director at Informed Choice; the award-winning firm of Chartered Financial Planners. He is author of Brilliant Investing: What the Best Investors Know, Say and Do (£12.99, Prentice Hall).