Answer these Questions before Investing in a Financial Product

In today’s market, there are many unique investment opportunities. Review and consider these points before investing in a financial product!

UNDERSTAND YOUR COSTS, BEFORE INVESTING IN A FINANCIAL PRODUCT

Fees and Costs associated with the choice to begin Investing in a Financial Product

Fees come in many forms, both upfront and overtime. Make sure you have a good grasp of the fee schedule. This should give you an idea of things like transaction costs, management fees, and the like. Some products have thresholds that essentially scale the fee based on the investment amount. 

There are all kinds of potential variations. If you’re dealing with a Financial Advisor, have them explain the life-cycle of the investment so you can understand how your pocketbook will be impacted. Also, ask the person if they are aware of any other hidden fees or costs beyond what a table shows. Remember, they should be there to help you.

The main point is to look for information on fees, read it, and make sure you’re aware of what you will be charged. Then, keep that cost in mind when you’re calculating returns. Higher costs will effectively net-down your return.

Know the tax impact of Investing in a Financial Product

In a similar fashion, make sure you have an idea about the tax implications. This might require asking a trustworthy Accountant or other financial professionals familiar with your money matters. In general, ask about tax treatment for your contributions, early withdrawals, and at maturity. Is there any immediate tax benefit, or is the tax benefit reserved for retirement? There could be no tax benefit, and that isn’t necessarily a problem. The point is to understand the tax treatment.

BEFORE INVESTING IN A FINANCIAL PRODUCT, UNDERSTAND WHAT YOUR ACCESS WILL BE AFTER THE FACT

Ease of Access and Holding Period Restrictions

Read the fine print. There might be lock-out periods after the transaction which would keep you from being able to access your funds if you ended up needing access to the money. Find out if there are lock-out periods, heavy fees for early withdrawal, or the like. This is something to keep in mind when making your overall decision.

Liquidity

As an easy and simple example, let’s say you have a bag of gold coins and you also have a share of stock from a blue-chip healthy company sitting in your online brokerage account. To sell the bag of gold coins, you might have to get in your car, drive to a coin store, and sell the coins in person. For the stock, you could simply opt to sell it during market hours. For this example, the stock has higher liquidity.

In my opinion, it is also a good idea to understand how liquid your investment will be. Within an ideal situation, demand will be high, and supply will be low when the time comes to exit the position (whether early or at maturity). This works in your favor as the owner. However, if you invest in something exotic, the market may not be there to make the sale. Of course, if it is, the broker might collect a higher piece of the pie than originally anticipated. These aren’t inherently bad things per se, it is just something to keep in mind as you invest. Ask yourself if quick and easy access to your investment is important, and factor that into your overall decision-making process.

UNDERSTAND WHERE THE MONEY WILL RESIDE AND WHO WILL BE RESPONSIBLE FOR IT AFTER THE TRANSACTION IS DONE

Is the company financially healthy?

While this may not apply to every investment or financial product, the essence of this point is to make sure you understand and are comfortable with the custodian of your investment. Take a few minutes to make sure the entity managing your product or investment is well-established and has a strong balance sheet. 

Who are the Decision Makers?

In the applicable cases of a fund manager, I recommend looking them up and getting a feel for their levels of experience relative to the complexity of the investment. Look at their credentials, previous experience, and anything else related to the selection at hand. Much of this information is available in a prospectus or similar reading material. Summaries are often also published with highlights.

Do your goals align?

Along the same lines, make sure you understand the stated goals of the investment or financial product. The respective manager or management team will be obligated to achieve those stated goals. As such, make sure you are on the same page with what you need and what the stated purpose and goals are of the investment or financial product.

BEFORE INVESTING OR BUYING A FINANCIAL PRODUCT, ASK YOUR SELF: DO YOU ACTUALLY NEED IT?

How well does it fit your plan?

Sure, this might well be an excellent financial product; make sure it actually fits with your financial plan. For example, can you effectively achieve the same objective, but at half of the cost? For a cool example, do you need that YETI cooler (they are really nice; nothing personal against YETI), or can you follow a DIY YouTube video and convert a Tupperware and a cheap plastic cooler into something comparable for a fraction of the cost? Is that extra money worth it for what you need? These are just a few crazy examples to make the point of making sure the investment or product fits your needs.

Find out what is under the hood

Do you have a good handle on the mechanics of what you’re about to transact upon? In general, I like Warren Buffett’s approach to investing in what you understand. Do some research and investigation to polish what you know, and dig-up answers for what you aren’t familiar with. 

Some of that effort can come from your financial advisor, accountant, or attorney. Ask them for their advice on the implications of the investment or financial product to your unique situation. All of us are at different points in our financial journey, and doing your homework up-front could save a lot of money and frustration in the long-term. 

BE CAREFUL WHEN INVESTING OR BUYING A FINANCIAL PRODUCT

Good and Bad Apples in Every Barrel

This is certainly not the case for every financial instrument, but when you are faced with an “amazing offer” take a minute to pause and carefully reflect. Ask yourself, “Is this really a free lunch” before taking the plunge. There are many helpful institutions and people doing good ethical work. However, there are always a few bad apples to contend with. Make certain you are working with an ethical company and/or individual. 

When possible and where applicable, I recommend trying to work with a fiduciary. They should have your best interest at heart, and they should be able to give you some pointers on the grand scale and scope of your specific needs. Alternatively, another advisor might be more inclined to drive a particular sale. To make it even better, try to work with people with whom there is already an established trusting relationship. If you’re new to the space, consider asking around for referrals and recommendations from friends, family, and co-workers.