Investment Due Diligence: Asking the right questions

The world of investment can be daunting, with a lot of jargon and complexity. However, this doesn’t need to be a scary time and knowing what questions to ask can make a huge difference.

Picking an Investment Firm

There are simply thousands of investment management firms to choose from. From huge companies listed in the FTSE 100 that oversee billions, too much smaller companies that may be managed by only a few individuals. Both have their advantages and disadvantages.

Ultimately, an investment firm should be transparent and help answer any questions that prospective investors have. The firm’s website should have details about who owns and runs the company, its background, the kinds of investments it runs and the expertise it has in these areas.

You should also see signs of regulation. Investment of most asset classes is a regulated activity under oversight by the regulator, the Financial Conduct Authority (FCA). Likewise, some firms will be covered by the Financial Services Compensation Scheme (FSCS) which can offer investors protection in worst case scenarios. Firms need to state if they are regulated along with information and T&Cs about the rules they must abide by.

To make sure you feel comfortable giving these firms your business, ask any questions you want. If in doubt, here are some basic questions that are worth asking:

Who owns the company?   Some investment firms will be owned by other, larger investment firms so it helps to understand the entity you’re engaging with.

How much do you charge? Investment firms will often say fees depend on the specifics of a given investment but push to get a clear idea of how much it will cost you.

Are you active, passive or both? As discussed in this guide, this can dictate a lot about how a firm approaches the market – try and get a good understanding of their approach.

What assets do you invest in? It helps to get an idea of how exposed and diversified a firm is (i.e. do they just invest in equities, or also in fixed income, property and commodities?).

What assets do you not invest in? Equally important, it helps to understand what areas the firm is keen to stay away from and why (i.e. crypto).

How are investments made and by who? Even the smallest firm should have enough experts to select, monitor and manage your investments – dig deep and find out who is in the team, how much experience they have and the way they make decisions.

Picking an Investment

Picking the right investment firm to go with is only part of the process. The underlying investments – be it a fund, share, instrument or specific asset – need to be fully understood. Your investment manager should be able to help with this, either answering questions you may have or giving you the relevant information and literature.

Never invest in something you do not understand. There are a lot of acronyms and jargon in the world of investment so it’s important to push past these and understand the underlying concept. At the end of the day, where is the money going and how could this generate a return?

Your questions will vary, depending on the investment, but again here are some key areas worth asking about:

1. Who is involved? Several parties can be involved in an investment – such as platforms, custodians and investment managers – so it’s important to understand who’s who and how complex the arrangement is.
2. How will the investment generate a return? Don’t feel afraid to ask questions, no matter how obvious. If the answer doesn’t make sense, push harder for clarity.
3. What are the risks with this investment? There are risks with all investments, but it’s important that you understand everything that could go wrong with the specific opportunity you are considering.
4. How much will this cost? Individual investments can carry their own charges, separate to the firm. Understand what these will be, in pounds and pence, and how often they charge to get an idea of the impact on your finances.
5. Is this investment protected? Regulated investments like stocks, shares, ISAs, unit trusts and investment bonds are protected by the FSCS but not everything is covered. Find out what protection you could potentially benefit from.
6. Who else am I investing with? Ask about who else is investing alongside you to get an idea of what would happen if other investors sold out before you did.

Making the right decisions together

Sometimes you’ll choose an investment firm and then its underlying opportunities, other times it’ll be the other way around – you’ll see a particular investment that catches your attention and then investigate the company presenting it.

Regardless, it’s more important to ensure any decisions you make around investments are right for your finances. Why are you investing in the first place? Knowing the answer to this question can then influence how you approach everything else.

Disclaimer –

This article does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the products described within. You should consult your financial adviser before making any decisions. As always with investments, your capital is at risk. The value of investments is not guaranteed and the income from them can fall as well as rise.