How to Choose the Right Investment Advisor
With the proliferation of investment and personal finance websites, investors have access to a boundless number of resources and tools once only available to financial professionals. And, while an increasing number of investors consider themselves to be at least somewhat self-directed in their investment decisions, the ever expanding world of investments and the increasing complexity of the financial markets require much more than a part-time approach to planning. With so much at stake, it seems prudent to seek the guidance of a qualified and trusted investment advisor, to both validate their own plans and decisions and provide further experience and guidance in this ever changing world. Choosing the right advisor is a critical decision that should positively affect their financial future and provide the peace of mind that comes from making informed decisions and being invested properly.
When looking for any professional advisor, it is important to be able to match their characteristics, temperament, client profile and experience level to your own profile. Is the advisor versed in all areas of financial planning and are they going to provide ongoing advice in these other areas, or are they going to only be involved with your investments? In the case of an investment advisor, the more you know about your financial situation, your investment objectives and preferences, and your tolerance for risk, the more thoroughly you will be able to evaluate an investment advisor to determine if they are a match. Before meeting with an investment advisor, conduct a thorough assessment of your current situation and establish clearly defined goals and objectives.
Who Does the Advisor Work For?
Advisor or Salesperson: With hundreds of thousands individuals calling themselves “financial advisor” or “wealth manager” or “investment specialist”, the challenge for investors is to wade through the marketing and advertising to be able to identify those financial professionals who truly put their client’s interests first. The financial services arena is vast and very fragmented among a number of different types of advisory models. Many advisor-types work for a financial institution, such as a bank, a stockbrokerage firm or an independent broker-dealer and are paid by their company to sell certain products and service. Other advisors have no allegiance to a company and are paid directly by their clients. Investors need to be able to determine which type of advisor is most likely to provide conflict-free investment advice.
Should You Pay Commissions of Fees?
Advisors who work for an investment firm or a bank earn their income primarily through commissions paid by their company that generates its revenue from the sale of products and services. The more products an advisor sells, the more income he or she earns, and the more revenue the company generates. While these advisors must adhere to certain standards of “suitability” when recommending investment products, they are not required to place their client’s interests first as the “fiduciary standard” requires. Although most of these advisors have the best intentions of doing what’s right for their clients, they often come under pressure from their firms to produce a certain amount of revenue. This can be conflicting for advisors and drive them to recommend products that they otherwise wouldn’t in particular situations.
At the other end of the spectrum are advisors whose sole source of income are fees paid to them directly by their clients. In this way, advisors are not beholden to a particular firm or any particular investment products. They can search the whole universe of financial products to find the ones that are most appropriate for their clients. Because they don’t receive any commissions or fees from product sales, they can be completely objective in their advice.
Professional Guidance or Sales Process
Both commission-based advisors and fee-only advisors work with their clients through some sort of investment planning. Investors should never consider a recommendation unless their advisor has worked through the process of thoroughly understanding their financial situation, specific objectives, and conducting a thorough risk assessment. Investors need to be able to discern whether the analysis performed by their advisor is truly a financial map for achieving their objectives or simply a justification for a product recommendation. One key test would be to ask your advisor after a product has been recommended whether there is an equivalent investment product available that has fewer expenses or smaller fees. If they say no or hesitate, you may be in front of a product salesperson.
Background and Experience
It is important to treat the selection of an investment advisor with the same process that you would go through for any major decision. Because your financial future is at stake, you need to ensure that your advisor possesses a solid background and substantial experience for working with people in your specific situation. Their background should be completely void of any disciplinary actions by the regulators, and look for professional designations such as CFP, CPA, MFS, CFA as indications of their commitment to knowledge and ethical practices.
Advisors who have not experienced at least one complete investment or financial market cycle (generally, about five years) may not be seasoned enough, and generally, the more experience the better.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.