Most people spend more time purchasing a mattress than they do researching an investment advisor.  Your list of criteria is unique and goes much deeper than a “hot” stock tip. One of the biggest challenges with finding the right financial advisor is that it is a very personal decision and no two people or criteria will be the same. Everyone will have their own list of needs, goals, objectives, and biases; all of which can drastically change who the right financial advisor might be.

With all of this to think about, it is extremely important to take your time, vet the options and understand the potential conflict of interest inherent to the business. Despite the fact that criteria will vary dramatically for each individual, there are things to look for to help assist you in choosing a financial advisor that has the duty to minimize conflicts of interest, and offers solutions truly aligned with your specific financial needs and life and legacy goals.

Broker-Dealer vs. Registered Investment Advisor (RIA)

A registered investment advisor (RIA) is considered to be a “fiduciary” to his or her clients. A fiduciary has the duty to work in the best interest of his or her clients, and to put the clients’ needs foremost. The SEC explains that “included in the fiduciary standard are the duties of loyalty and care.”

Broker-dealers are not bound to a fiduciary duty under federal law, states the SEC, but a broker-dealer is required to make suitable recommendations, and to disclose any conflict of interests to a client.

You may want to consider working with an RIA because they are held to a higher standard of care when managing your financial affairs.

Fee Structure

Understanding how the incentives work will be a very good indicator of how your financial advisor will behave with your money.  For example, a commission based advisor has an incentive to make recommendations based on a need to create volume rather than the merits of the underlying investment.  By engaging in a fee-based arrangement, the advisor will be able to sit on the same side of the table as you because his paycheck only goes up when your account grows.

No matter that situation, it is important to know how your advisor is compensated, and what that means for your own best interests.  Consider asking the following questions:

• What are the management fees for your advice/oversight?
• What are the underlying investment fees (i.e. mutual fund expenses)
• Do you derive any compensation from underlying investments (or from anybody/anything else)?
• Will there be transaction costs? If so, do they go to you or the custodian?
• What are your fees for additional services?

 Investment Advice

When an investment portfolio is being built for you, it is important to know who is making the calls.  The person you are dealing with is likely a sales representative.  It might be fairly obvious, but an important point not to overlook.  If your financial advisor is offering proprietary products, or has the dual responsibility of client interfacing and direct money management, chances are you interests aren’t being closely watched. After all, a financial advisor will never fire himself for poor performance. We believe you are best served by working with an advisor that helps build a portfolio using third party investment managers that make a living making investment decisions.

Financial Planning

With the proliferation of financial planning software, it has become increasingly easier to offer financial planning services to clients. Ultimately, a financial plan is only as good as its execution.  It might be important to assemble a team that includes a CFP, a CPA, an attorney, as well as the investment manager. Whether its financial planning, insurance or investment advice, make sure the firm/advisory team working directly with you has the expertise in all categories of engagements.

KOIT Women Talking Money

Selecting an Advisor, Cont’d.

Insurance

While most financial advisors today offer insurance, often times the determining factor in the recommendations for products or carriers are made for the wrong reasons (i.e. wholesaler relationship, sales incentives and or proprietary products).  You should make sure your advisor takes an independent approach to align the client’s needs with the appropriate and best solution.  By working with a General Agent with an open platform to choose from limitless products and insurance carriers, you are more likely to end up with an appropriate recommendation.

Custodial Responsibilities

Make sure the investment advisor utilizes a reputable 3rd party custodian.  Almost all investment fraud is committed by firms that not only manage their clients’ assets, but ones that custody those assets and are responsible for providing the detailed statements of those accounts.  Having a 3rd party validation (i.e. TD Ameritrade, Charles Schwab) helps to provide an extra layer of protection from the “Bernie Madoff” effect.  This provides an extra layer of protection as well as accuracy in account reporting.

Know Your Personal Deal Breakers

Lastly, like any business or personal relationship, know what your deal breakers are. Do you need constant communication?  Is underperformance over a full market cycle a deal breaker? Other things to consider are ongoing educational resources that are available to you and your family, a proactive vs. reactive advisor, etc.  Whatever it is that you want and expect from your advisor, make sure you articulate it, AND get it!

When it comes to your life savings or your retirement nest egg, you can’t afford to make a decision on promises alone.  Do you research, understand the different elements to the relationship and work with someone that you feel comfortable guiding you down your financial path.

Most people spend more time purchasing a computer or a mattress than they do researching to find the best investment advisor.  Take your time, do your research and use these guidelines when looking for a “conflict-free” financial advisor.  After all, second to your home, your investments are usually the largest asset you will have.  By using this matrix to assist you in choosing the appropriate investment advisor, you can be confident that the financial team you have assembled will be working to do what’s in your best interest.

Not sure where to start?  Contact Us and we’d be happy to help you find an advisor that best fits your unique personal wealth and finance needs.

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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