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Always have “Healthy Skepticism” When Evaluating Investment opportunities

| May 26, 2016
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Evaluating Investments

So, as some of you know, I was out of the office for a few days last week.  No, not an early summer vacation – I was working.  Working to help provide opportunities for my clients but also to try to avoid pitfalls “dressed as” opportunities.  Specifically, I was on a two day trip to an investment firm in Philadelphia that was offering what, on the surface, looked like a promising investment for me and my clients.

I can’t go into the specifics of what company and specific investment I was ”checking out” here on the blog, but I’ll relate the story anyhow because it illustrates how important I believe truly knowing and  understanding an investment is.  I’ll just call the firm “Firm A” and the specific investment “Investment A” for the sake of this article. At this due diligence meeting I had the opportunity to meet with Firm A’s management team, portfolio managers and their marketing and sales people. I always find such meetings to be very valuable and time well spent.

The bottom line is this: after two days at this meeting I did not come away completely convinced that their “Investment A” offered a risk/reward profile appropriate for most of our clients.  The management team, while hard-working good folks, did not impress me as having a clear vision as to why this investment would benefit folks like my clients.  The prepared presentation part seemed informative and on message.  However during questions I really wasn’t impressed with management’s ability to know this space with little experience to draw conclusions from.  Also, the sales team seemed very young to me…and while that alone isn’t a problem that, combined with sort of a “slap on the back” approach worried me!

While it wasn’t really the case at this Due Diligence trip, I have in the past been on DD meetings where the sales people and management seem to over- generalized and seem put out when someone asks tough, detailed questions about their investment.  Once when I asked a portfolio manager to explain the fee structure of his product he answered “what are you, an engineer or something” – inferring that it’s a detail only an engineer would need to know.  Well, to his surprise, YES, I am an engineer, or at least have an engineering degree. Also, I pointed out to him that every advisor should want to know the fees involved before recommending an investment to clients for their hard earned money! That was the end of that…and no, I never bought or recommended that product to anyone.

The point is, many investments sound great when it’s a marketing and sales pitch. Some even have nice charts and graphs to go along with it.  However, in my experience it pays to consider all opportunities with some healthy skepticism and ask tough, pointed questions.  As an advisor I get emails, calls and sales presentations on hundreds of investment products.  If they pass the tough review, great.  If not, then stay away from it. And if the manager seems to not want to answer questions he or she deem “too detailed” or “too tough” …..RUN!


The views expressed are those of THOMAS HAMILTON and not necessarily the opinion of LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Securities and Advisory Services Offered Through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC

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