The In-Person Complimentary Consultation
After you have completed your preliminary screening, and zeroed in on two or three Registered Investment Advisory firms that meet your general criteria, you will want to arrange the in-person, complimentary consultation, which is customary in the industry. When you contact the firm by email or phone call, pay careful attention to how you are treated at every step of the process. Does someone answer your request promptly and in a warm and professional manner? Do you feel at ease in communicating with this person? Are you treated with respect? These are very early cues that will preview things to come.
Knowing your advisor’s educational background will provide you a better understanding of their knowledge base and expertise. Common credentials, as stated in the previous blog post, include the following*: Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Personal Financial Specialist (PFS), and Certified Investment Management Analyst (CIMA). Assuming you are interviewing advisors that hold these types of credentials, you will want to feel comfortable with them, determine that they listen to your concerns, respond to your questions, and communicate clearly. These are the kinds of things you will experience throughout the consultation.
Questions to ask in this all-important area would be: 1) How will you be communicating with me during the year?, 2) How often?, 3) Can I expect you to reach out to me when some kind of crisis occurs in the financial markets?, 4) How often will I receive updates on my account?, 5) If you are not in the office, whom should I call?, 6) How often will we meet in person?, 7) What kinds of outreach communications can I expect to receive and how often?, 8 ) How often will I receive statements?, 9) How will I know for sure that your statement of my account is accurate?
Regarding Types of Services Offered
Typically, RIAs act either as money managers (aka investment managers), financial planners, or providers of a blend of those services. Money managers act on your behalf when it comes to your investments. Generally they are authorized by you to trade on your behalf and do not require your permission before trading—referred to as a discretionary relationship. Financial planners typically help you think through your financial needs and goals, and develop an actionable plan with the highest probability of success. The planning process will help you think through your spending and saving habits, your current and future needs, and how to plan for your future goals, e.g., funding your children’s education and retirement. When an advisory firm offers investment management as well as financial planning, they are referred to as “wealth management firms.” As mentioned above, you will want your advisory firm to offer financial planning.
Questions to ask in this area would be: 1) How much do you charge for financial planning?, 2) How does the financial planning process work?, 3) Can you show me what a financial plan might look like?, 4) How often would we revisit and possible reassess the financial plan?, 5) Are there ongoing fees for this?
Regarding the Firm’s Investment Approach
There are multiple strategies and philosophies underlying investment management. Some utilize stocks only, others bonds only, some a mixture of stocks and bonds, some utilize mutual funds only, and others a mixture of stocks, bonds, and mutual funds. Some firms are considered “active managers” and some are considered “passive managers.” Your advisor should be able to explain the meaning of these terms, as well as the firm’s investment strategy and philosophy to your satisfaction. It is important that you understand and feel comfortable with the firm’s investment strategy and philosophy.
Questions to ask in this area would be: 1) What is your investment strategy?, 2) What is your investment philosophy?, 3) Do you have complete discretion over the investment decisions with regard to my account?, 4) What is the history of your investment results over (at least) the past ten years?
Regarding the Custody of Your Assets
RIAs generally work with one or two custodians (brokerage firm or bank) that hold clients’ assets, such as stocks and mutual funds. You should ensure that the custodian holding your assets is a member of the Securities Investor Protection Corporation (SIPC) and that they are independent from the RIA. Your custodian should issue monthly or quarterly statements of your account or accounts, and the statement(s) should reflect the same balance as the statement(s) you receive from your advisor. Fraud and theft typically occur when an advisor maintains discretion over and custody of clients’ assets; this is never an advisable structure.
Questions in this area are straightforward: 1) Who will have custody of my assets?, 2) When and how often will I receive statements from them?, 3) How can I verify the accuracy of your reports?, 4) Will my assets be “liquid”?, 5) If I need to withdraw money from my account, how long will it take?
How your advisor is compensated may influence the recommendations and advice you receive. RIAs typically work on a fee-only or fee-plus-commissions basis. The RIA compensation types include fee-only, fee-plus commissions, commissions only, and wrap fees.
1. Fee-only – A fee-only compensation is either asset-based, hourly, or flat fees. Asset-based compensation is designed to reward your advisor for successfully growing your portfolio; the advisor will generally collect 1% -2% of the assets they manage for you. Hourly or flat-fees are usually the compensation method implemented when you’re looking to develop a financial plan or for any other specific one-time service. Fees are dependent on the account size and the type of service required.
2. Fee-plus commissions – Advisors may collect a portion of the commissions you pay on a financial product sale or purchase you’ve made based on their recommendation (i.e. insurance policies or annuities).
3. Commissions-only – Occasionally, advisors will receive compensation only on the investments they sell and purchase on your behalf. A commissions-only compensation method may lead an advisor to suggest that you increase the frequency in which you buy and sell your investments.
4. Wrap-fees – In some cases, advisors may charge a “wrap-fee,” essentially a single asset-based fee for his or her advice as well as his or her trade implementation.
The primary question to ask in this area is the obvious: What is your fee structure? Whatever the answer, you need to be comfortable with it. Our strong recommendation would be to select a fee-only advisor, as their interests are directly aligned with yours.
Investment Management Agreement
Ultimately, when you select your financial advisor, he or she should have you complete an Investment Management Agreement that states the terms of your relationship, the fees, as well as your investment objectives and risk tolerance. This agreement should be straightforward, clearly-worded, and non-binding. In essence, it should be an agreement between you and your advisor and not a contract. If it contains any penalties or fees for terminating the relationship, that is a strong sign that you selected the wrong advisor.
*This is not a complete list of credentials