Trust is the first thing to focus on when picking and investment advisor. But there are other things worth paying some attention to as well.
Fees, Fees, Fees
Investment advisors charge in different ways. Some are fee-only. Those fee-only advisors may charge one flat fee per year, giving you a source “on retainer” who you can turn to whenever a question arises. Other fee-only advisers charge by the service. Many advisors instead charge a commission, a percentage of your assets under their management. There are strong opinions as to which is the better model of the two.
The fee-only model seems at first glance to be the least likely to incent bad behavior on the part of the advisor. If they are paid a percent of your assets, will they be tempted to layer in a little too much risk in a reach for higher fees? Maybe not, but it’s an obvious question. But investment advisor Carl Richards (who charges his clients a percent of their assets) notes that even fee-for-service can have its issues. “Ask anyone who’s dealt with an attorney who charges hourly,” he says. “You don’t know why that project took 10 hours instead of seven. The important piece is transparency. Do you know how they are being paid?”
Ask outright if the advisor will be paid anything by the seller of an investment product he may put you in — like a mutual fund or an annuity. If so, that could cause a conflict of interest for the advisor and would be an indicator to proceed only with great caution.
Just like the National Association of Securities Regulators has an online database of brokers and their disciplinary history, the SEC keeps track both of nationally-listed investment advisors and links to the state regulators who oversee smaller firms. All of that information is available in their publication Investment Advisers: What You Need to Know Before Choosing One.
But are you any good?
This, unfortunately, can be the hardest question to answer. Advisors work with clients with many different goals and risk tolerance. There’s no simple benchmark to measure them against.
Jim McMichael, president of advisor Professional Asset Management Group, and someone with 40 years experience, offers a few things to look for:
No. 1 Experience working as a stock broker in one of the big Wall Street “member firms” like Merrill Lynch or UBS is a big plus. First, these firms hire people with good track records. Then they give them plenty of training including about the technicalities of how the markets work, something McMichael says any investor should have on their side. Avoid people with financial backgrounds that are not directly tied to investing. “Like accountants,” says McMichael. “I would put them in the same class as dentist. We speak the same language but their job is so different.”
No.2 Don’t hire anyone with less than 10 years experience. It takes time to learn how to do a great job. “Let them learn on someone else,” he advises.
No. 3 Focus on skills and talent. “Really smart guy: not a qualification,” says McMichael. “Really nice guy? Not a qualification. Helped my mom out on her death bed: not a qualification.”
“You have got to be comfortable with them,” he says. “There is definitely a sleeping factor, being able to sleep at night.”
Tomorrow: Part 3: Our chat with Carl Richards