Managing Assets: Advising Advisors For Investment Success

Investment advisors, also known as stockbrokers, are financial professionals who provide investment recommendations and conduct security analysis in exchange for a fee. They are responsible for managing their clients' investment portfolios and offering guidance on investment decisions, taking into account factors such as financial circumstances, risk tolerance, and investment objectives. These advisors can be individuals or firms registered with the Securities and Exchange Commission (SEC) and are held to a fiduciary standard, prioritizing their clients' interests. The fees for investment advisors vary and can be charged as a percentage of assets under management, flat fees, or hourly rates. When choosing an investment advisor, it is essential to consider their specialties, certifications, and fee structures to ensure they align with your financial needs and objectives.

Understanding the different types of investment advisors

Investment Advisors

Definition:

Investment advisors are financial professionals who provide investment recommendations and conduct security analysis in exchange for a fee. They can be individuals or groups, often referred to as stockbrokers, financial advisors, investment advisers, or investment counsellors. The term "investment adviser" is a legal term for individuals or companies registered with the Securities and Exchange Commission (SEC) or state securities regulators.

Responsibilities:

Investment advisors offer individually tailored investment advice and often manage investment portfolios directly. They may also offer financial planning services and brokerage services if properly licensed. They have discretionary authority over client assets and are held to fiduciary standards, always acting in their clients' best interests.

Registration and Regulation:

Investment advisors with $100 million or more in client assets must register with the SEC. Those managing less register with state securities regulators.

Broker-Dealers and Brokers

Definition:

Broker-dealers are individuals or companies that buy and sell securities like stocks, bonds, and mutual funds. They can act as brokers, dealers, or both.

Responsibilities:

Brokers provide intermediary services between individual investors and securities exchanges, usually earning commissions on trades.

Registration and Regulation:

In addition to SEC registration, broker-dealers are often members of FINRA (Financial Industry Regulatory Authority).

Certified Financial Planner (CFP)

Definition:

CFPs are financial advisors who have met rigorous training, experience, and ethical standards set by the CFP Board.

Responsibilities:

CFPs offer financial planning services, taking a holistic approach to cover budgeting, retirement, insurance, estate planning, and investment management.

Registration and Regulation:

CFPs are held to fiduciary standards and must always act in their clients' best interests.

Financial Consultant

Definition:

Financial consultant is a general term, but some hold the Chartered Financial Consultant (ChFC) designation. ChFCs have completed extensive education and adhere to a code of ethics.

Responsibilities:

Financial consultants provide financial advice and may offer a range of services, including investment advice and financial planning.

Registration and Regulation:

ChFCs have a fiduciary duty and must adhere to the code of ethics set by The American College.

Robo-Advisors

Definition:

Robo-advisors are automated investment management services that use algorithms to create and manage investment portfolios based on client goals, risk tolerance, and time horizons.

Responsibilities:

Robo-advisors simplify the investment process, offering low-cost, diversified portfolios of exchange-traded funds (ETFs), mutual funds, stocks, and bonds.

Registration and Regulation:

Robo-advisors are typically registered investment advisory firms or broker-dealers.

These are some of the most common types of investment advisors. Each plays a unique role in managing assets and providing financial guidance. It's important to understand their specializations and choose one that aligns with your financial goals and needs.

Knowing when to work with an investment advisor

You Need Help Realizing Your Financial Goals:

If you have specific financial goals, such as retiring early or purchasing a home, an investment advisor can help you create a comprehensive plan to achieve both your short-term and long-term objectives. They will assist you in navigating the complex world of investments and provide guidance on how to allocate your money effectively.

You're Unsure How to Invest Your Money:

Investing can be a daunting and confusing task, especially for those new to the field. Investment advisors offer valuable insights and direction, helping you determine how much to invest, where to invest (e.g., 401(k) or IRA), and how to adjust your portfolio based on market changes. They can also advise on the tax implications of withdrawing from retirement accounts.

You're Experiencing a Major Life Event:

Life is full of significant events that can impact your financial situation, such as getting married, starting a family, going through a divorce, or nearing retirement. During these pivotal moments, an investment advisor can provide clarity and guidance on merging finances, planning for the future, and ensuring your investments align with your changing circumstances.

You Received a Large Sum of Money:

Whether it's an inheritance, a windfall, or a large investment account, receiving a substantial amount of money can be overwhelming. Investment advisors can help you make informed decisions about how to utilise these funds to meet your financial goals and maximise their impact over time.

You Need Help with Debt Management:

Managing debt can be challenging, and many people struggle with it. Investment advisors can assist in developing a strategy to tackle your debt more effectively. They will consider your overall financial situation and provide guidance on how to allocate your resources to reduce your debt burden.

You Seek a Holistic Approach to Financial Planning:

Investment advisors often take a comprehensive view of your financial life. They can offer counsel on budgeting, maximising employer benefits, selecting insurance coverage, and other aspects of financial well-being. By addressing these areas, they help you build a solid foundation for your investment strategies.

Remember, it's essential to evaluate your financial situation, goals, and comfort level with investment risk before deciding to work with an investment advisor. They can be a valuable resource, providing knowledge, discipline, and a personalised approach to help you make the most of your assets.

How to find an investment advisor

Finding a financial advisor can be a daunting task, but it is an important one as they can help with a wide range of financial matters, from retirement planning to investment strategies and debt management. Here are some steps to help you find the right investment advisor for your needs:

Identify Your Needs and Goals:

Before starting your search, it is important to reflect on your financial situation, goals, and the specific services you require. Do you need help with retirement planning, investment decisions, tax planning, or something else? Different advisors specialise in different areas, so knowing what you need will help you find the right fit.

Understand the Types of Financial Advisors:

There are several types of financial advisors, offering different services and charging different fees. The main types include:

• Fee-only advisors: These advisors charge a fee for their services, which can be hourly, flat, or a percentage of assets under management. They do not earn commissions on investment products.
• Fee-based advisors: These advisors may charge a fee and also earn commissions on investment products they sell.
• Commission-based advisors: These advisors earn fees solely from the sale of investment products and services.
• Robo-advisors: These are digital platforms that automate investment decisions based on client input and tend to be more affordable but less personalised.

Seek Advisors with Reputable Credentials:

Look for advisors with reputable credentials such as CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), or PFS (Personal Financial Specialist). These designations indicate that the advisor has completed relevant education, passed examinations, and agreed to abide by a code of ethics.

Review Fee Structures:

Financial advisors charge in different ways, so be sure to understand their fee structure. Fees can include hourly rates, flat fees, retainers, percentages of assets, or commissions. Choose an advisor whose fees align with the services you need and your budget.

Research and Vet Advisors:

Use online search engines and advisor matching tools to find advisors in your area who meet your criteria. Ask friends and family for recommendations, and check the advisor's credentials and complaint history with relevant regulatory bodies. Interview multiple advisors and trust your instincts – if something feels off, there are plenty of other options.

Ask Key Questions:

When considering a potential advisor, ask questions about their experience, qualifications, services, fees, investment philosophy, and communication style. Remember, you are hiring an expert to work for you, so don't be afraid to ask for the information you need to make an informed decision.

By following these steps, you can find a financial advisor who is well-suited to your needs and who will help you work towards your financial goals.

How much an investment advisor costs

Investment advisors may be paid a flat fee for their work, but it is more common for them to be paid as a percentage of the assets they manage. An annual fee of one per cent of the managed assets is a typical charge, though some may charge less. This fee structure creates some alignment between the client and advisor, as their fee grows alongside the client's assets. However, it can also be costly, as this money is taken from the top of the client's portfolio, regardless of profit.

Robo-advisors, which are computer-based investment management services, typically charge an AUM (assets under management) fee of 0.25% to 0.50%. This works out at $125 to $250 a year on a $50,000 account balance. Some robo-advisors, such as SoFi Automated Investing and Ally Invest Robo Portfolios, charge no management fee.

Financial advisors who charge flat fees can cost between $2,000 and $7,500 a year. Some advisors charge an hourly rate, which can be anywhere from $200 to $400 an hour. A one-time financial plan can cost between $1,000 and $3,000.

Commission-based advisors may be paid a percentage of the investment transaction amount, typically between 3% and 6%.

How to choose an investment advisor

Choosing an investment advisor is an important decision, akin to dating—you are, after all, allowing someone a peek into an intimate part of your life. Here are some steps to help you select the right one:

• Recognize when you need help: You might not need an investment advisor if you are a new college grad with some basic financial goals like building an emergency fund or saving for retirement. However, as your financial situation becomes more complex—perhaps you've started a family, had children, or come into an inheritance—you might want to consider getting an investment advisor to help you manage your money.
• Consider a fee-only financial advisor: There is no federal law that regulates who can call themselves a financial advisor. Some financial advisors are bound by the fiduciary standard, meaning they are ethically required to work in your best interest. Fee-only financial advisors are paid based on a percentage of your invested assets, a flat annual fee, or an hourly rate. Their sole income source is the fees they charge their clients.
• Decide how much you can pay: Different investment advisors charge different fees. Some charge a percentage of the assets they manage for you (assets under management), while others charge by the hour, by the plan, through a retainer agreement, or a subscription model. Understand the fee structure of your advisor and make sure you can afford it.
• Research financial advisors: Ask friends, family, and peers for recommendations. Alternatively, look for financial advisors online. Many professional financial planning associations provide free databases of financial advisors, such as the National Association of Personal Financial Advisors (NAPFA) and the Garrett Planning Network.
• Hire a financial advisor: Contact the advisor or firm you wish to work with and schedule an initial consultation call. Before the consultation, gather some basic information about your short-term and long-term financial goals. During the consultation, ask the advisor questions about their investment philosophy, fee structure, types of clients they work with, and so on. After the consultation, the advisor will send you a contract and legal documents to sign.

Remember, choosing an investment advisor is a highly personal decision. Take the time to research and interview potential candidates before making your decision.

Frequently asked questions