Imagine if your doctor followed this standard when recommending medical treatment: you need a treatment for a serious ailment and the doctor recommends a “suitable” treatment. Not the best or most appropriate treatment, but a suitable one. He could offer you superior treatment, but instead he recommends a treatment using a pharmaceutical company that, in fact, pays him a good deal of money for such recommendations.
Seems absurd, doesn’t it? But this is exactly what investors face when choosing a financial advisor. The choice of an advisor who uses “suitable” as a standard for advice, or an advisor who is bound to a fiduciary standard to put the client first. It’s one of the top ten critical factors you need to consider when hiring an investment management firm.
Hiring a worthy financial advisor
Your financial advisor may eventually know more about you than your closest friend. Money matters are personal and important.
Having a good rapport with your financial advisor is certainly an important dynamic, but beyond that you must also consider these ten critical factors:
1. A fiduciary standard
Will the firm you are considering put your interests first? Traditional brokers work to a “suitability” standard. You know, like the doctor who offered the less-than-best treatment. A firm holding to a fiduciary standard discloses and addresses potential conflicts of interest and works in the best interests of the client. It is a very important distinction, and one you should get in writing from the firm you are considering. Ask whether the firm is a Registered Investment Advisor (RIA). RIAs are registered under The Investment Advisers Act of 1940 and are held to the fiduciary standard.
2. Transparent fees
Determining the “all-in” costs of an investment portfolio has been a murky process and well-guarded secret in the investment world. But a trusted investment management firm will explain all of the fees – seen and unseen – that will be charged. This can include hourly fees for financial planning and/or a fee charged as a percentage of the assets under management. High fees will degrade the overall return of your investment portfolio. Trusted financial advice does come at a price, but such fees should absolutely be forthright and fair.
3. Clear performance reporting
Tracking the progress of your investments doesn’t need to be clouded by an over-abundance of data. You want clear, easy-to-understand performance, holdings and transaction reports. Will you receive these reports monthly, quarterly, semi-annually? Find out how and when your portfolio will be assessed and reviewed with you.
4. A prudent investment process
Here is where your prospective investment management firm can really shine. Ask them to explain – in simple terms – their investment process. Expect heavy on details, light on jargon. What products and investment vehicles does the firm favor and what, if any, do they shun? Will investment changes be made only upon your approval, or will the advisor have the discretion to implement portfolio modifications? How often will you meet with your advisor? How will information regarding your portfolio be provided? Who is your main point of contact? Find out about their experience and credentials.
5. A third-party custodian
Check that the investment advisor uses an independent custodian such as Charles Schwab, Fidelity or TD Ameritrade. The custodian takes possession of your assets and provides reporting separate from your advisor. A custodian helps protect you from fraud. Madoff Investments maintained custody of their clients’ funds and were able to issue false statements as a result.
6. Service offerings
You should have a clear understanding of what types and level of service the advisor offers. Do they include financial planning in their standard offering? Which financial planning software do they use? Will you have access to the software? How often will they meet with you? When you contact the advisor, how quickly should you expect to hear a response? Does the advisor offer “getting started” investment offerings?
7. Education and events
If understanding and learning about the protection and growth of your assets is important for you, you will want to understand an advisor’s philosophy on education. Will they take the time in regular meetings to make sure you understand your progress toward meeting your goals? Do they plan to educate you about topics such as asset allocation and risk? Do they hold educational events?
8. Life events
Inevitably, you will face transitions in your life. You may get married and have kids or need help working through divorce or the loss of a loved one. Retirement can also be a major transition. Whether they are anticipated or not, these types of changes can be disruptive and emotional. Does the advisor have experience guiding clients through these changes? How will they help you through them? Do you feel comfortable opening up to the advisor? These are important and often overlooked factors if you aren’t currently facing a life transition.
There are basic requirements for an individual or firm to hold themselves out as an investment advisor. However, you will want to consider whether the advisors you are interviewing have gone above and beyond in an effort to optimize your planning and investment decisions. Do the financial planners and relationship managers have their CFP®, CPA? Do the firm’s investment professionals hold the CFA® designation?
10. Personal fit
Beyond credentials and process, you will want to make sure you feel safe and comfortable with the firm and investment professionals you entrust with your future. Would you feel comfortable being open and honest with the advisor? Do they seem to listen and understand your needs? Transitioning from one advisor to another can be disruptive to your financial plan, so you should feel confident that you can see a long and lasting relationship with your advisor.
Serious money requires serious consideration. Your wealth wasn’t built overnight and deserves prudent stewardship. Finding a trusted financial advisor and capable investment management firm is a process that deserves your time and attention.
And you might want to have a conversation with that doctor, as well.
Need some additional help? We put together a complimentary financial advisor selection checklist to help you evaluate your options from the type of advisor to services offered.