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Use the F.A.C.T. method.

Contributed by Ken Ennis is a contributor to the Fund.com Expert’s Desk and Managing Partner of ESE Advisory Group LLC.

F = Fees. Where have we heard that before? It’s always important, but especially if you’re going into what’s called a “Managed Account” program. In that event, your money will be invested across a number of investment types and classes, and you’ll likely pay your advisor a percentage of the assets they manage for you (typically expressed as “basis points,” where 100 basis points = 1% of the total). Study your advisor’s fee and determine if there are (or could be) any hidden fees beyond it. Managed accounts typically involve many hands in the pot — so before signing up, find out who will be involved and what percentages each will earn. Remember the folks we listed before: sub-advisors, investment managers, custodians, operational partners, etc.? In a typical managed account, each will take a piece of your money, on top of what your financial advisor takes. Don’t get us wrong: with the right advisor, a managed account can be an excellent choice, since it will typically offer great diversification and potentially higher gains, making the overall cost reasonable. Plus, to a large extent, such accounts align the otherwise divergent interests of everyone we’ve mentioned toward the single happy purpose of making you more money — because if you do, they do. But it’s particularly important with Managed Accounts to understand exactly who’s earning what from your money.

• Remember: YOU MUST ask your advisor for an “All-in Fee,” which includes everything and everyone you’ll be paying: all the players and all the services, including your advisor’s. As a rule of thumb, the All-In Fee for a Managed Account made up of all mutual funds shouldn’t exceed 2.75%-3.00%, of which your advisor should take no more than 1.25% or so; .90% is actually average for a financial advisor, so if they do want more ask them why — and if you don’t understand their explanation (their additional services, etc.) resist the temptation to shrug, check the box, and say “Oh. I guess it’s ok”. You don’t want to work with an advisor who intimidates you, so keep on asking until you really understand; and if the process gets tense, find another advisor. Explaining and justifying their fees is part of their job, and most will actually be willing to negotiate, within parameters that include the amount of assets you’re giving them to manage.

A = Account Type. Understanding the two main account types is important because it determines how much control you’re willing to give your advisor. The overall choice is between “non-discretionary” and “discretionary” accounts. “Non-discretionary” means that your financial advisor can’t do anything without your explicit “ok”. The opposite is true with “discretionary” accounts. Think “power of attorney”: you’re giving your advisor authority (discretion) to make changes to your account without your pre-approval. This can actually be a good thing, since it allows your advisor to make fast changes in response to dramatic events. But it also means that you have to be truly comfortable with your advisor. Even discretionary accounts have boundaries, so be sure you understand and agree about what those boundaries are.

• Remember: YOU MUST understand the extent of the discretion you’re granting your advisor. Ask a lot of questions – especially the “stupid” ones that embarrass you, because we can bet they aren’t stupid at all. Can your advisor buy and sell securities on your behalf — or just rebalance existing securities to match an asset allocation target (in other words, match the percentage diversification across investment classes that your risk tolerance and time horizon call for)? If you’re giving your advisor discretion to buy and sell, what types of securities are and aren’t eligible? And never forget the core rule: if you don’t understand something, keep asking until you do. If your advisor gets frustrated, find another advisor who won’t.

C = Choice. How much choice do you have in determining your asset allocation at the outset? Can you select from a list of securities or are you signing up for a closed program that puts all investors into the same sets of securities – which can actually be fine for people who don’t have large sums to invest and want to pay lower fees, or just want some limited market exposure.

• Remember: YOU MUST understand what choices you’ll have in your program, both when the account is set up and even more importantly once your money is invested. If you want the ability to tell your advisor to replace a particular investment that isn’t doing well, make sure your account type offers that flexibility. Most firms offer several varieties of managed accounts which satisfy different investor preferences.

T = Termination. Finally, before you sign on, get all the details about what’s involved in terminating the account. Will there be any fees? If so, will these be tied to how much time will have elapsed? And once you indicate your desire to terminate, can your advisor move your assets into another type of account without your sign-off? Finally, how long will it take to get your assets back?

• Remember: YOU MUST study your termination agreement before signing on. Ask your advisor whether you’ll get hit with penalties or transaction charges if you decide you want your money back, or if you choose to move it to an account at a different institution. In some managed accounts at large firms you’ll get hit with a 1.00% “exit/transaction/see you later/thanks for coming/don’t let the door hit your wallet on the way out” fee. Needless to say, that is not what you want.