How to Compare Investment Companies

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Picking an investment company comes down to your personal investment plan and your comfort level with financial planning. Factors such as cost, return rate, investment options, level of service and account access can be pivotal in making the right choice. Make sure those factors align with your financial strategies before allowing any firm access to your funds.

Benchmark Performance

The bottom line in investments is whether they raise or lower your account balance. The standard stock fund benchmark is the Standard & Poor's 500 Index, based on the performance of 500 large companies that trade on the New York Stock Exchange. The Wilshire 5000 and Russell 3000 indexes take into account a broader spectrum of companies. The performance of those indices doesn't reflect active money management, but rather the performance of a public and predetermined list of companies. Therefore, an investment that fails to outperform a benchmark is one where an investment company is, at least temporarily, costing you more and earning you less than a more basic tracking fund.

Similar Products

In addition to comparing an investment against standard indices, companies like Morningstar and Lipper provide data comparing fund performances in each class. This lets you see how companies fare against similar offerings from other firms. While past results aren't a guarantee of future performance, they serve as an indication of how an investment company is performing in relation to its peers. If you want to invest in small-cap funds, for example, and stick to investments with relatively small market capitalizations, Morningstar and Lipper data can show you which companies have been better at picking winners in those areas.

Narrow the Field

Though investment companies tend to offer a variety of products, some are geared specifically toward a certain type of client. Larger firms may have a longer list of choices than smaller ones, for example, or one company may deal solely in options trading while another works with bonds or stocks. This can be ideal for someone with diverse financial needs who wants to have his money with a single company. A specialized firm, on the other hand, may be more desirable for an investor with a singular investment focus.

Count the Costs

Investment firms do their best to get clients the desired returns. However, they don’t do it for free. Companies charge fees for investments and since those fees are more certain than returns, monitoring them is important. Expect to pay lower fees for index funds, which generally don’t involve as much work to manage. Companies with big-name investment advisers may charge a higher fee for their expertise. If so, make sure the returns are worth it. If you plan on executing a lot of trades, check out the cost per transaction as it varies from firm to firm.

Set Your Goals

When deciding on an investment, it’s critical to go in knowing what you want the investment to pay for and when you’ll need the funds. If you’re counting on the money being available in the near term, look for offerings that have low volatility and steady returns. If you’re looking for something with a higher potential return and are willing to tolerate the additional risk, find a company deals in those kinds of investments.

Trading and Services

Companies offer different levels of access to trading options and financial data. Many brokerages, for instance, offer online access to account information. Some also provide real-time investment valuation and the ability to make trades day or night. These tend to be larger companies that offer more options but less personal attention. A smaller firm may offer fewer bells and whistles while providing more service and a greater sense of involvement in your personal investment plan. The former may suit an experienced investor who doesn’t need much hand-holding, while the latter can be invaluable to someone looking for more financial guidance.

References

Photo Credits

  • Jacob Wackerhausen/iStock/Getty Images