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Choosing Investment Advisors

August 13, 2013

Financial advisors are essential in helping clients develop, implement and manage their financial plans.


Financial advisors can include:


  • Brokers
  • Bankers
  • Investment or wealth managers
  • Financial planners
  • CPAs
  • Attorneys
  • Insurance brokers and agents


Brokers hold your funds and should be separate from the investment managers or planners who might order the trades and transactions.  Brokers can also make recommendations, execute trades and manage your portfolio.  Brokers are subject to strict regulations as custodians of your funds.


Bankers are the keepers of your cash and cash equivalent funds and make loans and mortgages.


Investment managers will manage the portfolio and make the investment decisions to implement the plan and goals.  Some managers have full discretion to buy and sell securities and others will check with their clients before executing any trades.


Financial planners will direct the overall investing plan, assist in determining goals and risk, strategy, asset allocation, rebalancing and tax planning of the investments.  Financial planners may also sell you the products they feel you need and manage your portfolio.


CPAs will be your tax advisors and can also review your financial plans, budgets and spending, asset allocation and location and tax plans to help determine if it meets your stated goals.  Some CPAs also are financial planners and sell products or manage portfolios.  For those, their roles are bifurcated and so is their compensation.  CPAs can be used as sounding boards and someone to run a transaction by if you do not fully understand it.  Sometimes I find CPAs to be an effective “time out” delay mechanism to provide time to consider an investment – just say you want to check out the tax aspects with your accountant.  This acts as a “cooling off” period you might need.  Also, it may not hurt to get a second opinion.  But, always keep in mind my rule for investing… if you do not understand what you are asked to do – don’t do it!


Attorneys are usually involved with the review and preparation of legal documents and agreements; and some can be involved as business or transaction advisors.


Insurance brokers and agents can advise on proper protection, risk management, coverage and recommend and sell long-term care, disability income, life insurance policies and annuities.


Finding these people is not as easy as listing who is needed.  It will require you to get recommendations; check references and credentials, review SEC and regulatory agency files for unresolved complaints, and interviews to obtain a comfort level that your future advisors will understand your goals, risk tolerances and have the right level of experience to help you.


We all know that no one works for “nothing” – when they do, it is called a hobby.  This is not a hobby for you and should not be for your advisors.  It is incumbent upon you to be told, clearly, how your advisors will be compensated, the basis for it, the payment terms and for you to determine the value of those payments.


Some advisors get paid an hourly rate, while some charge a fixed fee for the project or year and there might be minimum yearly fees.  It is typical for portfolio managers to receive a percentage of the assets they manage; and some get this fee plus a “performance” amount if they exceed certain benchmarks.  Some get commissions and fees from the places they direct your funds to.  Whatever the arrangement, it needs to be thoroughly explained to you and what extras, bonuses or contingencies are built into the structure.  Where product commissions or fees are paid to the advisor you should be clear under what circumstances this will happen.  If it will ever transpire, then you should be told how the advisor will deal with commissions and fees that will be paid to them, or their companies, directly or indirectly when they are paid to them even though they are unsolicited by them.  And, get it spelled out in writing so that there are no misunderstandings.  Also, find out how you will be billed for expenses and what the expenses are.


Despite the time and involvement in finding the right people, engaging people is a lot easier that discharging them.  Very few fire people as soon as they should.  There is a “second chance” cooling off period, once it becomes evident that someone needs to be discharged.  There is also the discomfort of telling them you no longer want them on your team.


Another facet of managing your finances is to have your advisors function as a team.  At appropriate times they need to communicate with each other, keep each other in the loop, and should attend an annual meeting, which can be costly to you, but can provide great benefits if the right planning can be developed and implemented.  It also provides you with an oversight by professionals and gives you an opportunity to see them interacting on your behalf.


Every facet of your investments, including advisors, should be carefully considered.  Choosing the wrong advisors can cause irreparable harm.  Put the effort in and you will get the benefits you need.

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