How to Pick an Investment Advisor

The investing world is becoming increasingly complex.  New investment options, including mutual funds, exchange-traded-funds and closed-end funds seem to be flooding the market daily.  In fact, current estimates put the total number of funds in excess of 10,000. Given the dizzying array of investment choices, investors, not surprisingly, are often turning to advisors to help them navigate.

In addition to picking investments and providing wealth-management services, advisors can be helpful with more basic financial planning.  For example, they can assist in mapping out a strategy to help a family reach its financial goals such as saving for college or retirement.  In my practice, I also like to be a sounding board for clients considering any major financial transactions (e.g., buying a second home or making a car purchase).  Financial decisions can be stressful and having a second opinion never hurts.

One of the reasons individuals are hesitant to use investment advisors is that they simply don’t know how to pick one.  There tends to be a lot of fear involved in the decision and it can prevent people from taking action.  Picking an advisor does not need to be a stress-inducing experience.  Here are a few key strategies that I’ve learned from nearly twenty years in the industry that may help you.

  • Meet the Advisor – I would say the most important step in picking an advisor is meeting them. The personal relationship is critical and you must feel comfortable with the person giving advice.  Ask yourself some basic questions – Would I enjoy meeting with this person and would I gain comfort from our discussions?  Do we have a good rapport?  Is the communication clear?  On a related note, you should confirm that the person you meet with is the person that you will work with.  Many large advisory firms are quick to turn you over to support staff and you will find it hard to track down the original point-of-contact.
  • Make Sure Your Advisor is Only Paid by You – You need to make sure that your advisor is working for you and that means they should only be paid by you. Sounds simple, right?  Unfortunately, many investment professionals are double-dipping.  That is, they are paid by their clients AND they receive “kick-backs” from various products for steering clients in a certain direction.  Obviously, this latter situation creates an inherent conflict of interest and should be avoided.
  • Use Only Registered-Investment-Advisors (“RIAs”) – In the financial advice world, there tends to be two main types of advisors (brokers and RIAs). In my opinion, it is best to only use RIAs.  RIAs have the highest “standard-of-care” in the industry.  That is, RIAs are required to always put a client’s interest ahead of their own.  I can’t imagine having it any other way.  However, brokers have traditionally only been held to a standard that required their investment choices to be “suitable” for clients.  In my mind, that’s not good enough.
  • Seek an Appropriate Level of Experience – Like all professions, experience matters for investment professionals. Ideally, the advisor will have relevant financial experience in multiple market conditions (e.g., growth cycles, recessions and various interest-rate environments).
  • Beware of Sales-Focused Advisors – Some advisors have an emphasis on working with a target number of families to help them achieve goals whereas others seem to have an imbalance toward obtaining new clients. I think it can be helpful to ask an advisor if they have a limit on the number of clients that they expect to take on.  If an advisor does not have limits, then service levels will inevitably be low and the quality of advice will suffer.
  • Stick with Large and Reputable Custodians – When an advisor manages money on behalf of a client, that money resides with a “custodian.” The custodian is typically a bank or a platform like Charles Schwab.  While the advisor makes decisions around buying and selling investments, the custodian is tasked with holding (i.e., safe-keeping) of the assets.  It is possible for banks and other platforms to fail and put client assets at risk.  As such it’s important to stick with advisors that utilize well-regarded firms for this very important, and under-appreciated, task.  It’s not the size of the advisory firm that matters, it’s the size and strength of the custodian when it comes to custody risk.

Seeking the help of a trusted professional can be a life-changing experience.  I highly encourage it not only for peace-of-mind but to improve your chances of reaching your financial goals.  Happy hunting!