5 Steps to Becoming a Better Investor

It is challenging to find the right investment manager.  At a minimum, you want someone who is knowledgeable, ethical and takes the time to understand your goals and present situation.  Last week’s post on Greg Smith’s resignation from Goldman Sachs outlined some of the pitfalls you may experience with the wrong firm. 

While there is more to life than money, having enough of it when you need it most is extremely important.

The end goal of finding the right investment manager isn’t (or at least shouldn’t be) merely to amass piles of money.  It’s to form and adhere to a plan that offers you the best chance for achieving what you most want out of your life, while avoiding too many painful setbacks along the way.  If you look at investing through this lens, it clarifies how you and your advisor can view your wealth management in the same, best light:

Begin at the beginning: create a plan

Are you and your advisor guided first and foremost by a mutually formed plan that defines your unique financial goals and describes a sensible process for achieving them?  If not, what else can you rely on besides blind luck to find your way (and how reliable is that)?

Ensure that your goals drive the process

I recommend that your plan be in the form of a written Investment Policy Statement that you and your advisor have signed, and that you revisit together periodically to ensure that it continues to reflect your evolving circumstances.  By sticking with this approach, you’re investing according to your own goals, rather than the whims of an ever-fickle market.

Find a fiduciary

Financial intermediaries such as brokers expose you to potential and real conflicts of interest.  While some transactions are “perfectly legal,” by definition, they may benefit the broker and not you.  In contrast, a Registered Investment Advisor (RIA) is legally obligated to form a fiduciary relationship with you, which means that the RIA must act in your highest financial interests in managing your wealth.

If someone is determined to break the law, a written agreement isn’t going to stop them.  But, it is beyond me why anyone would open themselves up to the prospect of being legally ripped off (in the form of unnecessarily higher costs or less-appropriate investments), when it is so readily prevented by ensuring your advisor is a fiduciary.

Talk the talk

Have an investment strategy.  A plan is a great start, but, ultimately, it’s only as good as your ability to stick with it.  An advisor’s key role is not only to help you design your plan, but to serve as your constant ally in adhering to it under all market conditions.   He or she should consistently encourage sensible investment activities and remind you what you’re about if you are tempted to stray (such as panic-selling when the markets turn bearish, or chasing hot streaks when the market’s on a tear).

Walk the walk

Last but certainly not least, your advisor should establish his or her business and service offerings to complement rather than conflict with all of the above. Some of the characteristics to look for include: 

  • Transparent, fee-only arrangements.  Greg Smith’s Goldman Sachs op-ed piece illustrated all too clearly the conflicts of interest that can arise when your “advisor” is operating in an environment in which portions of his income are in the form of often undisclosed commissions and similar incentives coming from outside sources.
  • Arm’s length custody.  Your assets should be held by a separate custodian, who sends regular, independent reports directly to you, so you can substantiate your advisor’s activities on your behalf.  Ideally you should have online access to your account.
  • Passive management.  Easily a topic for another post, but the recommended investment solutions within your portfolio should be optimized to help you achieve your personal goals. Briefly, this translates to funds that are “passively” managed to capture available, long-term market risk factor premiums as effectively and efficiently as possible.  A passive strategy helps you avoid the costs and inconsistencies found in attempting to outfox the market through “active” predictions.  The market as a collective, highly informed entity is pretty tough (and expensive) to attempt to beat.
  • Go over your results at least once a year.  Find someone you can trust and also verify the results.  You can’t expect to do well every year, but you should at least know your returns.


There is a lot we cannot control: the business cycle, changes in tax policy, political instability and even acts of terrorism.  But we can concentrate on the things we can control.  The proper relationship with a fee-only advisor is your best chance for a positive result.


About the author

Roger Streit, CFP®

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