Invest Like a Philosopher: Selecting a Manager

"The fool doth think he is wise but the wise man knows himself to be a fool."  William Shakespeare (1564-1616), "As You Like It," Act 5, Scene 1

My "Where to Invest 2007" posts were quite popular but I have since reminded myself that "how to invest" is a fundamental concept that is constantly overlooked by the average investor.  As of today, I am beginning a new category of posts, called "Invest Like a Philosopher."   The string of posts will demonstrate how to invest in a way that a philosopher would whole-heartedly approve and utilize -- one that is simple, smart, strategic, sound and in the best interest of the investor. 

Any philosopher knows that we must first begin with the end in mind.  The first step in learning how to invest is not learning how to select investments -- it is learning how to select managers.

This crucial step is perhaps the most overlooked and, in my experience as an investment advisor in Charleston, SC, the most potentially harmful for individual investors if not undertaken correctly.  For the philosopher, recognizing the identity of the manager is simple:

• If you construct a portfolio of mutual funds yourself, then every time you select a fund, you are selecting a manager of a particular portfolio of securities.  The fund managers and analysts do all of the research, stock selection, monitoring, and resulting buys, holds, and sells.  The only "management" you partake in is fund selection and asset allocation (distributing your dollars to various funds). 
• If you construct a portfolio of individual stocks yourself, then you are selecting yourself as the complete manager of your portfolio.
• If you select an investment advisor to manage your portfolio, then the advisor, and quite too often an invisible team of analysts, is making investment recommendations while the advisor either "advises" you on the allocation or uses the "advice" as window dressing to sell products.  In this case, it can be difficult to accurately identify the manager, their true motivation, and what impact these factors have on you as an individual investor.  Check here to know the difference.

Before hiring an advisor (or manager) of something as important as your hard-earned money, it is imperative to know their background, performance record, and, more importantly, their motivations.  Simple questions can eliminate poor decisions: 

• Would you hire an advisor who is likely a glorified sales person with just enough investment knowledge to sell products while some other unknown team of analysts makes recommendations?  If so, you would hire the traditional stockbroker.  A philosopher would not.
• Would you hire an advisor who works for an enormous financial firm that is not recognized for expertise in investing?  If so, you would hire an insurance company representative, a banker, or other advisor not specializing in the most crucial area -- investments.  A philosopher would not.
• Would you hire an advisor that is paid by the products (investments) they "recommend" as opposed to an advisor paid by you (the client).  If so, you would hire any of the above "professionals" I mentioned.  A philosopher would not.
• The philosopher is wise enough to know him or her self to be a "fool." Would you hire you to manage the most important portfolio of financial assets you will ever own?  Unless investment management was his or her passion and expertise, a philosopher would not manage their own investments.

OK, so what kind of advisor would a philosopher hire to manage their portfolio?  You now know who a philosopher would not hire so the answer, found within yourself, depends on your passion and expertise: 

• To be a philosopher, you must follow your passion.  If investing is your passion, and you have the expertise required, then you can hire you as the manager. 
• If you have the passion but lack the expertise, then you may still seek knowledge to obtain the expertise (Follow all of my "Invest Like a Philosopher" posts for more knowledge). 
• If investing is not your passion and you recognize that you are not knowledgeable of investing concepts, then you must hire a professional that is passionate and knowledgable so you may follow your own passion with more time and energy.  Remember  -- "a wise man knows himself to be a fool..."   

To select the right manager, start by seeking out a "fee-only" financial planner that specializes in investments.  Since the fee-only planner is not paid by anyone or any entity other than you, then there will be no bias to product or first loyalty to a particular firm.  If possible, go with an independent financial planner / investment advisor.  Independence from a larger firm assures the most client-centered attention from an advisor possible.  This questionnaire is an excellent resource to find an investment advisor / financial planner or to ask of your current advisor.

Stay tuned for more details on how to invest like a philosopher...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a fee-only, registered investment adviser based in Mount Pleasant, SC, near Charleston.  ACI specializes in retirement, investments, and comprehensive financial planning.