Financial Outsourincg – Due Dilligence Required!

Here I Go!

Outsourcing has gotten a bad rep but in reality outsourcing is an integral component of modern life. I outsource cooking (when I go to a restaurant), lawn care, manufacturing (clothes, household products) and to some extent financial management.

So when I outsource financial management by hiring a financial advisor or investing in mutual funds or giving up control of other financial matters – what should I be worried about?

Look at it this way – when I am evaluating my evening meal I consider the ratings the restautant has, any feedback from friends/family, prices and deals. In other words my due diligence is basically to help me have a good experience by getting value for my time and money. From another perspective – you are mitigating risk of a bad experience by investing in upfront research and validation.

The same model applies to financial management risk management. Consider the following

Credibility-
Before you entrust your money and financial future to an unknown entity – you have to validate their credibility. Ratings, reviews, affiliations and word-of-mouth are basic research tools to consider. Bernie Madoff proved that credibility is not the only attribute to evaluate but it is a start.

Cost-
The biggest cost component you need to consider is – how is the advisor getting paid? Think about it – if he is being paid by the mutual fund company or someone else – where is his allegiance? Fee based is usually a better option and as always the price needs to be commensurate with expertise/value provided.

Investing Model-
A financial advisor should provide a holistic perspective of your financial life. Financial life is not limited to the 401(K) or investing some money in the stock market. Financial life should encompass your cash flow, saving goals, retirement goals, education objectives, pre/post tax investment strategies, diversification across assett classes, insurance, taxes, mortgage management and time horizons.

Visibility-
What is the advisor doing with your money, why is doing it and when is he making those decisions should also be visible to you. Visibility comes via regular reporting at a detailed level that makes sense to you. A monthly or quarterly meeting may be merited to review and assess progress of your portfolio.

Formalization-
It should be in writing. Expectations, roles, reporting and the scope of the services provided should be documented and formalized. Even a plumber who fixes your faucet gives you a written estimate of services proposed – you should expect more from a financial advisor.

If you decide to outsource financial management and use a financial advisor – make sure you do your homework because what is at stake is your financial future.


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