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Investors should do their homework when selecting an investment firm to trust with their wealth. Having worked offshore for over twenty years, I have seen numerous banks and brokerages open with much fanfare only to close their door within a few years, leaving their clients in financial limbo. Opening an account with an offshore or onshore investment firm should not be about a leap of faith. There a number of simple steps investors can take that will help them choose the right firm.
Firstly, find out who owns and who manages the financial institution. If you are not able to find this or the institution is not willing to tell you, then find another firm. It is extremely important to know the people or family who you are working with and that they are honest and capable. This is a critically important first step in selecting the right investment provider.
How long has the firm been operating in the financial industry? Continuity is important, in order to ensure that the people and firm you work with today will continue to be there for you and your family in the future, and able to facilitate generational wealth planning and transfer. Another reason this is important is, statistically speaking, more than half of financial firms fail in the first five years. Having a history is one indication of Management’s competence and experience. When markets are volatile, it is reassuring to have a partner that has experienced financial market turmoil in the past. Experience becomes strength, wisdom and reliability.
Does the firm have an annual independent audit? An audit measures the robustness of its internal controls and procedures to ensure assets are properly accounted for and segregated. The knowledge that a professional third party has conducted testing on an institution’s controls and structure is invaluable.
Is the firm’s balance sheet strong? A review of the firm’s balance sheet will give you an idea of their financial strength and allow you to determine how leveraged or how much debt they hold to assets. Generally, the less leveraged the firm is, the more likely they will withstand external shocks. As has been proven in the past, big brand name firms are not always the safest place to hold your assets. Many blue chip banks in the US and Europe became insolvent due to being massively leveraged during the 2008 financial crisis. It is often difficult to measure a bank’s financial strength as they carry all customers’ assets on their balance sheet. A quick indicator is to look at the bank’s non-performing assets or loans (usually in the audit notes) and subtract this number from ‘shareholders equity’ on the balance sheet. This may at least provide a quick indication of the institution’s solvency.
Is there an internal compliance and accounting structure in place at the company? Tested firms are proud of their track record and management capabilities. Measuring the effectiveness of this is trickier, but establishing if there is a qualified Chief Financial Officer and a Chief Operating Officer at the Executive level is a good start.
Are the firm’s products subject to third party reviews or ratings? An example of this would be Morning Star Investor Services ratings on mutual funds run by the firm, such as LOM’s top Five Star rated Fixed Income Fund. The rating is given after review of not only the performance of the funds, but also how fund assets are held, and the overall structure and management.
Does the firm carry insurance for ‘error and omissions’ or ‘crime and fraud’? Insurance provides protection but is also another indicator of the firm’s systems and procedures being reviewed by a professional independent party. The insurance company is not only evaluating the company’s controls and structure, but providing insurance on the likelihood of not having to paying a claim based on the company’s strong internal controls.
Are the firm’s counterparties stable (other professional firms with whom they have dealings)? Financial firms can build deep moats but no firm is an island in this global economy. Every firm faces counterparty risks. These can be contained, but there is risk with every transaction. Strong counterparties help mitigate these risks. These counterparty institutions are other custodians, banks, brokers and exchanges. Finding out who the firm works with and how often they evaluate counterparty risk could be beneficial in determining the right partner.
Is there proper corporate governance in place and are there independent directors on the board? Does the board have an audit committee? The governance structure provides a set of guiding principles for management to operate and develop business strategy and set risks parameters. Experienced independent directors provide a backstop and sounding board for internal policy.
Some other good key indicators are if the firm is regulated by a respected financial authority or listed on a public exchange, as this will provide additional oversight, transparency and history. Find out if a company is a publicly listed entity (or a subsidiary of one) as they have an additional duty to provide transparency and information on finances to the public markets in addition to the Regulatory Authority.
As a client, insider and director of LOM Financial Limited, I am pleased to say that I am able to answer in the positive to all of the above questions if one should ask in regard to LOM. We have modelled and built LOM and the internal systems to be robust and address questions we ask ourselves on a daily basis as investors, managers and directors. Keep in mind, these are just the first few steps in the right direction and are by no means comprehensive but will start you on the right track to financial security and freedom.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
