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Ed Butowsky Wants You to Test Your Financial Advisor

2012 May 29
Posted by LoanStar

Internally recognized Investment Advisor, Ed Butowsky, challenges you to ask your financial advisor these 4 critical questions that will reveal how competent they are to manage your investment portfolio. If they score less than 100%, you might think twice before trusting them to manage your hard-earned money.


Question 1. If I had a portfolio that has a historical rate of return of 10 percent, what should my standard deviation be? In addition, what is my portfolio’s historical rate of return and standard deviation?

Answer 1: Your standard deviation should be 60% or lower than your historical rate of return. High correlations between assets will inevitably create an undesirable ratio between your standard deviation and historical rate of return.


Question 2. What is the Sharpe Ratio of my portfolio and what should it be?

Answer 2 : You must have a Sharpe Ratio of 1 or better. Harvard, Yale and all major business schools teach this. You are taking too much risk for your expected return if your Sharpe Ratio is below 1.


Question 3. What are the total fees being charged…including: Investment Fee, Management Fee, Commissions and Custodial Fee?

Answer 3: You should not be paying more than 50-70 basis points to manage your money. You should not be charged on money market or bonds. An experience manager can help reduce these unnecessary fees.


Question 4. Will you send me a copy of my correlation matrix?

Answer 4: If you request a copy of the correlation matrix of your current portfolio and its assets and your investment advisor cannot provide it, you should hire someone who will.

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