How to Choose the Right Investment Advisor

How to Choose the Right Investment Advisor

With a wide array of investment and personal finance website tools available to you, an investor is likely to have access to hundreds of resources and calculators that were once only available to the Wall Street professionals. And with this ability, comes the self-research and self-direction needed in the ever expanding world of investments. However, who is to say that all this information will be tailored to your lifestyle or even, who is to say that the information will be accurate?! 

Increasing complexity of the financial markets require much more than just a part-time approach to planning.  With so much at stake, it would be important to seek the guidance of a qualified and trusted investment advisor - if for no other reason than to validate your own plans and decisions. 

When looking for any professional advisor, it is important to be able to match their characteristics, personal temperament, and experience level to your own profile. In the case of an investment advisor, the more you know about your financial situation, the more you will thoroughly be able to evaluate an investment advisor to determine if they're the right match for you. How does one exactly determine their independent plan of action or philosophy before seeing an advisor? Consider the following:   

  • Understand your investment objectives - what do you want to do with the money over a period of time?
  • What is your overall tolerance for risk - what are you willing to lose if the market were to crash?
  • How long are you looking to invest the money - are there any foreseen issues that would limit this?
  • What types of investments would you like to have included in your account? - Stocks, Bonds, ETFs, Variable Annuities, Trusts, etc. 

Consider these questions and do your research. The best way to form a partnership is to know what you are willing to bring to the table. Once you've developed your own philosophy, consider these tips below that can help you find a trustworthy financial planner in your area. 

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. This is called having a fiduciary service to the client. Sounds ideal, right? Unfortunately, the financial services arena is very vast and very fragmented among the different types of models, financial institutions (banks, stockbrokerages, broker-dealers, etc) that are paid by their company to sell certain products and services to make their quota. Other advisors have no allegiance to a company and are paid directly by their clients. Please keep this in mind when choosing an advisor, as we strongly encourage the path of least resistance and conflict. Advisor Tip #1: Find a Fiduciary, Independent Financial Planner

Should You Pay Commissions of Fees?

Advisors who work for an investment firm or a bank earn their income through primary commissions that are paid from the sale of service or revenue. 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, 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. Advisor Tip #2: Find a Financial Planner that works for the client; not for the name above the door.

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 their best interest as opposed to service that is financially mapped out for their client in order to achieve the objectives or justifications for stock 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 hesitates, you may be in front of a product salesperson. Advisor Tip #3: Find an Advisor that builds the Lowest Rate or Fee for your benefit.

Background and Experience

It is important to treat the selection of an investment advisor much like the hiring of an employee. The right kind of advisor does work for you. Because your financial future is at stake, you need to remember that you are the boss and they are the interviewee. In so many words, ask for their Resume - or, ask to see if they have 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 (check the FINRA broker-check website), and it should include progressive educational and industry accomplishments to demonstrate their commitment to their profession.  Look for professional designations such as CFP, ChFC, MFS, CFA as indications of their commitment to knowledge and ethical practices. Advisors who have not experienced in at least one complete investment or financial market cycle (generally, about five years) may not be seasoned enough. The more experience the better as long as it has been gathered working with people in situations similar to yours. Advisor Tip #4: Ask for Credentials, Years of Experience, Background, and Ethical Professional Philosophy. 

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