Your Money, Your Adviser: A Match?

Choosing the right investment adviser is crucial for achieving your financial goals. Investment advisers are financial professionals who provide guidance and make investment recommendations for a fee. They are different from financial advisors, who are registered representatives. When selecting an investment adviser, it is essential to consider your specific needs, the adviser's qualifications, potential conflicts of interest, and their fee structure. Conducting thorough research and understanding their services, fees, and investment offerings will help you choose an adviser aligned with your investment objectives.

What services do you need?

When considering whether you have the right investment adviser, it is important to evaluate the services you need and whether your adviser is capable of meeting those needs. Here are some key points to consider:

Investment Advice and Guidance

The primary role of an investment adviser is to provide guidance and recommendations on investment products, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). They should help you make informed decisions about buying, selling, or holding investments by offering ongoing advice. They should also monitor the performance of your investments and ensure they align with your overall investment objectives and risk tolerance.

Financial Planning and Analysis

Investment advisers may also offer financial planning services. This can include helping you with retirement planning, tax strategies, budgeting, and debt management. They may conduct in-depth analyses of your financial circumstances, goals, and risk appetite to tailor their advice accordingly.

Industry Knowledge and Expertise

Look for an investment adviser with a strong understanding of the financial industry, market trends, and investment products. They should be able to provide insights and recommendations based on their knowledge and experience. Ask about their qualifications, certifications, and licenses, such as the Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) designations.

Customized Investment Strategies

A good investment adviser will work with you to develop customized investment strategies that fit your unique needs and financial goals. They should take the time to understand your investment objectives, time horizon, and risk tolerance to create a plan that aligns with your specific circumstances.

Transparency and Communication

Transparency is crucial when working with an investment adviser. They should disclose their fee structure, any potential conflicts of interest, and their investment approach. Ask about their typical forms of communication and how often you can expect updates or reviews of your investment portfolio.

Regulatory Compliance and Registration

Ensure your investment adviser is registered with the Securities and Exchange Commission (SEC) or the appropriate state securities regulator. This provides an extra layer of protection and accountability. You can use tools like FINRA BrokerCheck or the SEC Action Lookup to verify their registration status and background.

When evaluating whether you have the right investment adviser, carefully consider the services and expertise you require. Conduct thorough due diligence, ask questions, and ensure your adviser understands your financial goals and is equipped to provide the guidance and support you need to achieve those goals.

What are their qualifications?

When it comes to qualifications, there are a few key areas to consider when evaluating a financial advisor's expertise.

Firstly, academic qualifications are important. While there is no legal requirement for a financial advisor to have a college degree, most financial firms require their advisors to hold at least a bachelor's degree, preferably in a related field such as finance, marketing, or business. A Master's in Business Administration (MBA) is not mandatory but can certainly enhance an advisor's credentials.

Secondly, professional licenses are essential. To sell securities, financial advisors must pass licensing exams, such as the General Securities Representative license (Series 7) and the Uniform Securities Agent State license (Series 63). Advisors intending to charge advisory fees also need to pass the Series 65 exam or the Uniform Investment Advisor Law exam. These licenses ensure that advisors have a solid understanding of investment knowledge and regulations.

Thirdly, additional certifications and designations can provide further assurance of an advisor's competence. The most well-known certification is the Certified Financial Planner (CFP) qualification, which indicates a comprehensive understanding of financial planning. Other designations include the Chartered Financial Consultant (ChFC) and the Chartered Financial Analyst (CFA). These certifications often require extensive coursework and work experience, further establishing an advisor's expertise.

Lastly, real-world experience is invaluable. Financial advisors need strong interpersonal and sales skills to attract and retain clients. Most financial firms prefer candidates with some professional experience, and internships or previous careers in finance can be advantageous.

In summary, when evaluating a financial advisor's qualifications, consider their academic background, professional licenses, additional certifications, and practical experience. This will help ensure that your advisor has the knowledge and skills necessary to provide competent and trustworthy financial guidance.

How do they get paid?

Investment advisers are compensated through fees, which are typically based on the value of the assets held in the client's account. This fee structure aligns the adviser's success with that of the client. Advisers may charge a management fee based on the size or performance of the client's assets, providing them with a financial incentive to work towards the client's success.

There are three main types of investment advisers in terms of compensation:

• Broker or Broker-Dealer: Brokers receive commissions based on the products they sell and the investments they recommend. These commissions can be upfront (when the client buys), back-end (when the client sells), or trailing (receiving a portion annually). While brokers are required to make recommendations that are "suitable" for the client, this standard is set by a private organisation, the Financial Industry Regulatory Authority (FINRA), and may not always be in the client's best interest. Brokers may push certain investments with higher hidden commissions, such as annuities and mutual funds, which can create a conflict of interest.
• Hybrid or Dually Registered Adviser: These advisers are registered as investment advisers and licensed through FINRA. They can act as fiduciaries, putting the client's interests first, but they can also sell investment products as brokers and receive commissions. This dual role can create conflicts of interest, as they may have different standards of care for different accounts with the same client.
• Registered Investment Adviser (RIA): RIAs have a legal obligation to act as fiduciaries and must register with the Securities and Exchange Commission (SEC). They must disclose their compensation structure upfront and explain any conflicts of interest. RIAs typically earn revenue through a management fee, which is a percentage of the assets held for a client, averaging between 1-2% of the total value.

Additionally, investment advisers may fall into one of the following categories in terms of their fee structure:

• Fee-Only: Fee-only advisers do not sell products or accept commissions. They work solely for their clients and are compensated through hourly rates, fixed annual retainers, or a percentage of the investment assets.
• Fee-Based: Fee-based advisers may earn fees for their services and also receive commissions from selling certain investment products, creating potential conflicts of interest.
• Commission-Based: Commission-based advisers are compensated only by the companies that sponsor the investments they recommend. Their services are free to the client, but they may be incentivised to promote certain products over others, which may not align with the client's best interests.

What is their fee structure?

When selecting an investment adviser, it is important to understand their fee structure. Investment advisers are compensated for their services in a variety of ways, and it is essential to know how they are paid to ensure their interests are aligned with your own. Here are some common fee structures used by investment advisers:

Asset-Based Fees

This type of fee structure is based on a percentage of the client's assets under management (AUM). The fee is typically calculated as a percentage of the total value of the investment portfolio, ranging from 0.25% to 1% or more per year. For example, an investment adviser might charge a 1% management fee for a $1 million account, resulting in a $10,000 annual fee. This structure creates an incentive for the adviser to grow the client's assets, as their success is directly linked to the client's success.

Transaction-Based Fees

Transaction-based fee structures involve paying commissions or 'loads' when purchasing products or trading in the market. These fees are typically associated with full-service broker-dealer transactions and can be either a flat fee per transaction or a percentage of the investment amount.

Flat Fees

Some investment advisers charge a flat fee for their services, which can be an annual or hourly rate. This structure is often used by fee-only advisers, who do not earn commissions from investments. Flat fees provide transparency and predictability in the cost of advisory services.

Performance-Based Fees

In some cases, investment advisers may charge additional performance-based fees if their recommendations or strategies outperform a specified benchmark. These fees are intended to reward advisers for superior performance and can be structured in various ways, such as a percentage of the excess returns generated.

Combinations of Fee Structures

It is worth noting that investment advisers may combine different fee structures. For example, they might charge an asset-based fee for investment management and a flat fee for financial planning services. The specific combination of fee structures will depend on the adviser and the services provided.

When evaluating an investment adviser, it is crucial to understand their fee structure and any potential conflicts of interest. Be sure to ask questions, review the contract carefully, and consider using free search tools to verify the adviser's registration status and any disciplinary history.

Do they have a history of disciplinary issues?

When choosing an investment advisor, it is important to check their history for any disciplinary issues. Disciplinary action can be taken against financial advisors who engage in unethical or illegal behaviour. Common examples of such behaviour include Ponzi schemes, affinity fraud, misrepresentation or fraud, churning, breach of fiduciary duty, and conflict of interest. Disciplinary records for financial advisors are available through state or federal-level securities regulators.

In the US, the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA) are the primary regulatory authorities. They can investigate complaints and take disciplinary action, including revoking an advisor's license, imposing fines, and filing criminal charges.

Before hiring a financial advisor, it is recommended to conduct thorough due diligence, including verifying their credentials, understanding their investment style and fee structure, and being vigilant for any red flags that could indicate unethical behaviour.

• Ask for their credentials: Request information about their licenses and certifications to ensure they are qualified to work in your state. For example, a financial advisor may need a Series 7 license or a Certified Financial Planner (CFP) certification.
• Verify through SEC and FINRA: Check the SEC's Investment Adviser Public Disclosure (IAPD) website and FINRA's BrokerCheck website for any disciplinary actions or complaints filed against the advisor.
• Review their investment style: Ensure their investment approach aligns with your objectives and risk tolerance.
• Understand their fee structure: Be aware of how they are compensated to identify any potential conflicts of interest.

Additionally, you can check for red flags, such as an excessive focus on short-term returns, premature promotion of annuities, or boasting about a large client base. It is also important to review their background and verify their credentials through the IAPD and BrokerCheck websites. These sites provide information on disciplinary actions and complaints.

By following these steps, you can make an informed decision and choose an advisor who is ethical and aligned with your financial goals and objectives.

Frequently asked questions