5 Things You Can’t Ignore About Your Financial Advisor

May 19, 2015

Connect Member

Portfolio manager and founder of CAIM, an independent, women owned investment management firm.

caimllc.com

Financial advisors can have major conflicts of interest. With your investments, children’s education, and retirement portfolio at stake, it is important to understand how your investments are being handled. Some may charge hidden fees, and in certain cases may not even directly handle your money.

Look for an advisor that will give you personalized financial advice that is catered to your needs. Someone whose goals are aligned with their clients’ can offer advice on myriad complicated needs, such as estate planning and asset management.

1. Conflicts of Interest
A Registered Investment Advisor is a fiduciary. This means she has taken an oath to act in the best interests of the client, and to disclose any conflicts of interest that might exist between herself and the client. RIAs receive no bonuses or commissions. Instead, they provide advice and recommendations they view as being best for you for a fee agreed upon in advance.

A broker, on the other hand, has taken no fiduciary oath and may sells products loaded with up-front fees, hidden fees, or exit fees. Brokers also typically make a commission every time they handle a financial transaction on your behalf, which may encourage them to “churn” accounts unnecessarily.

Registered Investment Advisors receive no bonuses or commissions. Instead, they provide advice and recommendations they view as being best for you for a fee, agreed upon in advance.

2. Having Too Many Clients
Asset gathering is the name of the game when it comes to large firms. Unfortunately, having a large volume of clients often means that the average broker cannot devote the one­-on-one time and individualized attention to clients that a private investment firm can.

Before you hire an investment professional, ask how many clients they have and the average amount of money each client has. Most brokers are coached to spend 80 percent of their time on the top 20 percent of their business.

3. Who Is Really Managing Your Money?
Some advisors are often unable to explain exactly what’s in your portfolio. Many advisors say they are portfolio managers because they allocate your assets, but will often hand off the stock or bond selection to third-party money managers, mutual funds, or ETFs. Which raises the question: Who is actually managing your money?

You will want to ask your advisor questions about how they chose these people to manage your money, how they stay in touch with these managers, and if there is an extra monetary incentive for them invest in these funds or use these managers. Past performance alone is not a legitimate reason for choosing a manager. Instead, have your advisor explain how the investment philosophy is aligned with your goals.

4. Look for Experience.
Advisors may work for investment firms, but most of their time could be spent bringing in new clients while trying to retain the old ones. With the heavy pressures of a sales agenda, there is little time to actually study the markets.

Seek out a seasoned RIA who is also educated about, and understands, the intricacies of the market. You may want to consider looking for someone who has been in business for at least seven to 10 years. RIAs are also required by law to provide up­-front disclosures to all their clients about their qualifications, services, and compensation.

5. Avoid High Fees.
In a brokerage firm, everyone gets a piece of the pie. At a fee­-only investment firm, clients are charged a simple, agreed­-upon-­in-­advance fee based on your holdings. As further safeguard, and by law, Registered Investment Advisors cannot earn any other profits from their clients.

In summary, you should:

  1. Hire a fiduciary who has time for you.
  2. Make sure you understand who is managing your money.
  3. Negotiate if your fees are over 1.5 percent.

To learn more about investment strategy and managing investment portfolios, visit CAIM.

You understand that no content published as part of the CAIM LLC blog constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person. To the extent any of the content published may be deemed to be investment advice, such information is impersonal and not tailored to the reader.

Catherine Avery is a member of the DailyWorth Connect program. Read more about the program here.

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