No matter how financially sophisticated you are (or think you are), the importance of transparency can never be understated. One of today’s most widespread independent investment strategies, for example, is purchasing exchange traded funds, commonly known as “ETFs.” ETFs offer some valuable benefits: they can be easily traded online and provide a cost-effective method for accessing both standard indices like the Dow and non-traditional asset classes like emerging markets. Of course, not all ETF’s are created equal. As the ETF market has developed, some ETF mandates have become highly specific, complex or leveraged. Consequently, it is vital that any ETF be sufficiently transparent regarding how various market conditions might affect its performance. If you’re unsure, investigate. If you do have an investment adviser, remember: you’re paying them for their expertise. Either get what you’re paying for or find a new adviser.
Honest communication is the soul of successful money management. If a hedge fund says it has a robust governance structure, spend the time (or money) to discover precisely what that means. Does it have a clearly defined investment process, a long-term business model, verifiable internal compliance procedures, regularly scheduled independent audits – and, where appropriate, a reputable external advisory structure? Have the confidence to demand specific answers or to request strategic adjustments. And if you ever do become alarmed that your expectations are not being met, time is always of the essence.
I’m frequently shocked by how often some of the wealthiest investors express outrage at having paid years of outrageous management fees, despite not once having investigated what their own dollars were accomplishing (if anything). Highly expensive governance “protections” can actually sometimes decrease returns by limiting a manager’s efficiency or talent. Merely accepting the assurances of a fund manager or investment adviser is not meaningful communication. Real transparency is never one-sided. It is evidence-based, encourages dialogue and should always be viewed as non-negotiable. In that spirit, don’t take my word for it – just ask anyone who trusted Bernie Madoff.