How to Pick an Investment Advisor (Part 3): Carl Richards’ 3 Key Questions

Carl Richards may be best-known for his regular writing at the New York Times Bucks Blog, Daily Worth, and his own Behavior Gap newsletter. But Richard’s (other)  day job is running his investment advisory firm Prasada Capital.

Partly because he writes a lot about financial matters, and partly because he just gets the question all the time, Richards has thought a lot about how to find a great financial advisor. He defines a good advisor as  someone who will really help clients meet their goals. “My standard is where would I send my mom,” he explains. His term for them, the “Secret Society of Real Financial Planners,” acknowledges that these people are not easy to find. Though he knows planners “having a really positive impact” he also acknowledges that for every good egg, there are probably 10 you’d be better off avoiding. (Video of the full interview with Richards is below.)

The hunt for the right match is worth the effort, Richards says. “I’m a huge believer in advice and I think  it’s worth going through the hassle. Most people think ‘I don’t understand this stuff and it seems so complex…and figuring out who to hire is so complex. Most people just give up. I actually think it’s worth going through the initial complexity to get to the simplicity at the other side of having someone who is the family advisor. It’s a quaint idea, but that old fashioned crafts person that you can call and say ‘I don’t know what to do here,  can you help me?'”

Third-party advice is especially important in investing, Richards argues. “Because so many of the mistakes we make with our investments are behavioral, it really helps to have someone to walk you in off the ledge when you’re thinking about doing something stupid. Which is something we all do. Investment advisors should have an investment advisor too.”

Richards doesn’t restrict his “Secret Society” to registered investment advisors. A good broker can be a great advisor too, and he knows several who fit the Mom test. He does stress that one has to understand that brokers have a duty to their employer first, and should be thought of as you would any sales person. Their job is to make what they have to sell very appealing. “That’s an ok business model. I’m not saying brokerages are evil. If you go to a Honda dealership you wouldn’t expect them to tell you to buy a Toyota if a Toyota is really what’s best for you.” Richards notes that it does not matter what a person’s business card says — broker, wealth advisor, or anything else — if they work for a brokerage firm, if they are regulated by the National Association of Securities Dealers (NASD) (now known as the Financial Industry Regulatory Authority or FINRA) their allegiance is to their firm’s best interest.

By contrast,  an investment advisor has a legal fiduciary responsibility to put the client’s best interest  first and to disclose any conflict of interest on compensation or any issue.

Transparency: How Do You Get Paid?

The question is not only how the client pays the advisor (some are fee for service, some on a flat retainer, some on a percent of assets under management), but how much the advisor is paid in total. Do they get any additional payment on any products from another party? “I don’t think you’re every going to find a conflict-free relationship,” says Richards. “The important piece is to understand where the conflicts are and to be aware of them and try to manage them.”

Where is My Money Held?

When things are working right, your money will actually sit at a third party, “custodial” firm. These are firms like Fidelity, TD Ameritrade, and a host of others, that will actually hold your account. You may give your investment advisor the right to trade in that account and to automatically withdraw his (disclosed!) fees, but it’s your account. Your advisor should not be taking money out except for the legally agreed upon fees. You should get statements directly from them, and if you needed to you could call them and cancel your advisor’s privileges or even close the account.

What’s This Advisor’s Record?

How well has he done getting his clients to their goals? That can be tough to quantify, but talk to some of those clients and see what they say. Go to the SEC site and read up on any advisor’s disciplinary record.

Unfortunately the video quality here is a bit off —  including my odd  pink glow — but the audio is fine and as usual Carl’s points are thoughtful and accessible.


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