Ten questions to ask your financial advisor before handing over your cash

Nowadays, people who would like to invest their money in a slight safer way than investing it on the stock market, often put their savings in a fund. Funding is a way to provide capital that a rather large group of people raise, mostly to finance a business or a project, such as the health fund.

Unfortunately, the Bernard Madoff scandal has scared many investors around the globe. The people who invested in this may have gotten tricked into a scam, so the question that the people ask is: how safe is it to invest in a fund.

Fortunately, on the other hand, there are ways in which ordinary investors can help minimize their chances of buying into an unsafe fund. Along with Justin Urquhart Stewart, of Seven Investment Management, the writer has put together a list of questions that may help you decide whether you should, or shouldn’t buy into a fund.

You should always know what kind of investments the fund you buy into makes. It will give you a clear idea of what kind of fund you get involved with. Another import essence of the fund is a clear investment strategy. As an investor, you want clarity of what’s about to happen to your savings. If their strategy is not clear to you at all to you, you may reconsider about this way of investing.

Now how about the risks of a fund? How does it measure the risk, and how risky is it? You should absolutely be aware of the potential risk that may emerge. It’s important to be entitled to know how risky a fund, and to know how big the measure of the risk is for the managers, is before putting money into it.

A crucial factor to decide to step into a fund or not remains the full costs of it. Hedge fund managers in particular often charge performance fees of up to 20% of your profits, which doesn’t seem to be attractive to the most of us, but of course without the fund managers their probably wouldn’t be a lot of profit if you don’t quite understand investments.

Another downside of a fund is that is not easy at all to get your money out of it if you want to. Mostly you will have to wait for several months to get it back, of course with a rather high interest percentage you will have to pay on top.

If you ask your fund manager who he is regulated by, the answer shouldn’t be “no one” if you are looking for clear investment strategy. You should be very wary of investing your money there.

You should also look for a fund in which you are protected if it goes bust.

I think you should really consider every detail and make sure you know what you’re doing when you invest in a fund. At first sight it may seem too good to be true, and most of the times, you’ll notice that it is, once you’ve gotten into it.

By reading the hints, you should be aware of any danger that could appear before you buy into a fund. They’re not all as reliable as they seem, so it’s very important to ask a lot of questions to the fund manager.

The fact that the fund manager charges a rather high commission on his profits (which he made for the investors), might scare some people away, but if he’s charging this much, you might get a better feeling about your money, knowing that it’s in the hands of a professional.

Of course because you can not withdraw your money from the fund at any time, you may reconsider stepping in, but that’s the risk you take by taking it away from your savings account and investing into a fund. Of course the interests will be much higher than before.

I would definitely consider replacing my savings into a fund, but only if I know for sure that there is a clear strategy, and I am familiar with the investments the fund puts it’s faith in.

Source: http://timesbusiness.typepad.com/money_weblog/2009/01/ten-questions-to-ask-a-fund-manager-before-handing-over-your-cash.html

Written by
Tom Baeyens,
Student at Artevelde College
2FI2