In this week’s blog entry, we touch on key points to consider when choosing an investment advisor, whether you are looking for an advisor for the first time or are interested in finding a new one. The search does not have to be daunting or impossibly complex if you keep a few basic recommendations in mind:
1) Look for a Registered Investment Advisory (RIA) firm that is fee-only rather than commission-based or a hybrid, and an RIA that can provide financial planning services by a Certified Financial Planner® as well;
2) Look for an RIA and an advisor with which and with whom you are comfortable and can trust; and,
3) As best you can, have a basic sense of your objectives in mind, including the things that are most important to you in your life.
Your advisor should be a “thinking partner,” as well as a licensed financial expert, who will be able to help you clarify your priorities and goals, and develop with you an investment strategy and financial plan to help you reach those goals.
Investment advisors can be found in large financial institutions, e.g., multi-national banks and brokerage houses, or in a number of smaller independent firms. The terms investment advisor and financial planner are liberally used throughout the banking, brokerage and insurance industries, so it is important that you know what these titles mean and whether the people using them are appropriately educated, certified, licensed and compensated.
At banks, brokerage houses, and insurance companies, advisors are paid on commission and charge commissions on the financial products they recommend.
The Registered Investment Advisory (RIA) Firm
RIAs are required by the Securities and Exchange Commission (SEC) to be conflict-free, which means that they cannot receive commissions of any kind for any financial products they recommend. They are known as fee only firms. They charge a fee that is based on a percentage of assets under management. Typically, advisors employed by these firms have earned a minimum of a four-year college degree and such professional designations as Chartered Financial Analyst (CFA), Certified Financial Planner® (CFP®), Personal Financial Analyst (PFA), and Certified Investment Management Analyst (CIMA)* and hold the certification and licensure required by law to hold their professional roles. The RIA is held to the highest fiduciary standards in the financial industry.
Some independent investment management firms are known as hybrids, which means that they may charge some commissions on the financial products they recommend, but they also may charge a percentage fee based on assets under management.
RIA’s can vary from one another in multiple ways, including: size; style; business philosophy; investment strategy; required minimum investment; whether or not they offer or require financial planning; and how elaborate or detailed those financial plans may be.
An RIA is not allowed to hold custody of your assets. Assets should be held at a custodian that is independent of the advisory firm. This separation of advisor and custodian helps protect you from the kind of fraud and abuse perpetrated by the Bernie Madoffs of the world. The statement you receive from your RIA must agree with the statement you receive separately from your custodian, e.g., Charles Schwab, or you will immediately know that something is amiss in your account.
Conduct a Preliminary Screening
Before choosing an advisor, you will want to collect as much information as possible about the firm that interests you prior to making an appointment for a free consultation. You will be able to learn quite a bit about them from their website and from their official brochure, known as a Form ADV, which must be filed with the SEC. It will include the firm’s history, philosophy, and business practices.
The ADV provides an outline of how an advisory firm conducts business. The ADV is split into two parts with each part describing different aspects of the advisor’s professional operation. Part 1 details an advisor’s firm structure, business practices, and existing disciplinary record. Part 2 outlines an advisor’s services and fees.
To access this form and do a preliminary screening of a Registered Investment Advisory firm, visit the SEC website: www.adviserinfo.sec.gov. Please note that not every investment advisory firm is registered with the SEC, as smaller firms may register only with their state.
After you have completed your preliminary screening, it is important that you take the time to meet with and interview your potential advisor. These meetings are, and should be, free of charge.
Coming up: Choosing the Right Advisor: Key Questions to Ask.
*This is not a complete list of credentials