Simple Tips for Choosing the Right Investment Adviser
Choosing the right financial professional starts with knowing what truly matters. Explore practical tools and steps to make informed decisions with confidence.
Just because a financial professional is a fiduciary doesn’t guarantee they are the right fit for you. While fiduciary advisers are meant to operate under the highest standards of loyalty and care in the money management industry, a firm’s business structure, values and experience—among other factors—also play a key role.
Your Checklist for Choosing a Financial Professional
To avoid falling prey to the next Bernie Madoff in your search for an investment adviser and find the financial professional who’s an ideal fit for your needs, it’s essential to understand their business structure, fees, custody arrangements and asset management experience—ensuring they align with your goals and priorities while safeguarding your investments.
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Structure
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Fee Structure
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Asset Custody
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Experience
Who Handles Sales, Service and Portfolio Management?
Some financial professionals wear too many hats. They may focus on sales and have trouble returning client calls or managing client portfolios. When spread thin like this, these individuals may not be able to provide the level of service you may need to reach your long-term goals. But there are other options. Other financial professionals have specialized roles, separating service, sales and portfolio management duties to ensure you’re always working with someone focused in their area and, importantly, on you.
A firm’s corporate structure may also be a key consideration. For example, privately held companies often have the flexibility to prioritize client needs without external pressures. Publicly held companies, however, must balance serving clients with meeting shareholder expectations, which may create potential conflicts of interest as they focus on quarterly earnings and revenue goals.
What Are The Incentives and Conflicts Of Interest?
Understanding your financial professional’s compensation structure—and potential conflicts of interest—is crucial.
Some sell financial products that earn them fees or commissions that may not be the best option for a client. Others may say they are “fee-based,” which means they can earn fees while still earning sales-related compensation like commissions on products they sell.
By contrast, a “fee-only” compensation model helps structure the investment adviser’s incentives differently—with no sales-related incentives, there are no sales-related conflicts of interest. While no financial professional or an investment adviser is truly conflict-free, fee-only investment advisers align their compensation to clients’ asset growth over time. Fee-only compensation structures can be more straightforward and transparent than others in the industry.
Did You Know? Key Benefits of a Fee-Only Financial Professional.
- Transparency: Clear, simple fees mean no hidden costs or commission-driven advice.
- Aligned Interests: A fee based on the value of your account means the investment adviser’s incentive is to grow your portfolio—helping align your interests with theirs.
- Cost-Effectiveness: A fee-only model can help you avoid some of the other layers of fees prevalent in other models—such as commissions, kickbacks, upfront fees and more. Avoiding unnecessary fees can make a huge impact on your ability to maximize long-term growth.
Who Has Control Of The Assets?
When it comes to managing your investments, understanding how your assets are held and protected is essential. A third-party custodian plays a crucial role in safeguarding your financial future. This independent entity is responsible for holding and protecting client assets, separate from the investment manager. Here’s why working with a financial adviser who partners with a third-party custodian offers critical advantages:
- Increased Transparency: A third-party custodian grants you direct access to your accounts and statements, allowing you to independently monitor balances, verify transactions, and ensure your investments are being properly managed.
- Reduced Risk of Fraud: By separating asset custody from investment management, a third-party custodian prevents any single entity from having unchecked control, adding an essential layer of protection.
- Regular Audits and Oversight: Subject to strict regulatory audits and oversight, third-party custodians ensure client accounts are accurate and secure, uncovering irregularities quickly.
- Segregation of Duties: Dividing the responsibilities of managing and holding assets creates checks and balances, minimizing conflicts of interest and enhancing accountability in financial management.
- Enhanced Client Protection: With insurance safeguards and compliance standards, third-party custodians offer an additional level of security, protecting clients against potential fraud or mismanagement.
Choosing a financial adviser who partners with a trusted third-party custodian can be a crucial step in protecting your investments. This relationship fosters transparency, reduces risks and ensures accountability, giving you peace of mind that your assets are being handled with care.
Do They Have Experience In Financial Services? Are Clients Benefiting From Their Approach?
As we’ve mentioned, not all financial services providers have experience making decisions about investments and client portfolios. Some do not manage client portfolios.
Look for a financial professional with a long history of making investment decisions through all types of market conditions—including bull and bear markets. You may also want to ask if they have a research department to help inform their recommendations and ask more detail about how their research group is structured—do the analysts have a wide scope of coverage? Or are they experienced in (and solely focused on) specific coverage areas—like particular industries and regions of the world?
Did You Know? Key Benefits of a Large, Experienced Research Organization.
- Deep Experience and Comprehensive Insights: A robust, well-structured organization can cover a wide range of industries, sectors and global markets. Having a well-rounded understanding of opportunities and risks and can shift portfolios ahead of the market conditions they expect ahead—including bull markets or shorter- or longer-term negative market volatility, like corrections and bear markets.
- Data-Driven: Well-resourced Research groups have access to—and analyze—vast amounts of data, identifying trends and patterns that can help them develop and evolve their forward-looking market views as conditions shift across the global economy, politics, investor sentiment and more.
- Risk Management: They help identify potential risks and provide strategies to mitigate them.
- Timely Decision-Making: With a dedicated Research team, portfolio decision-makers receive up-to-date information and analysis, enabling them to act quickly in dynamic markets.
- Credibility and Confidence: A robust Research team acts as the backbone of informed investment strategies, helping firms navigate all types of market conditions to help their clients reach their long-term goals.
A Cautionary Tale
The story of Bernie Madoff—a disgraced investment adviser and broker-dealer who went to jail in 2008 for swindling thousands of clients out of billions of dollars via an elaborate Ponzi scheme—is a classic (and tragic) cautionary tale that shows even someone who is legally a fiduciary can stray from duty-of-care practices.
For example, rather than housing clients’ money at reputable third-party custodians—neutral, independent parties that hold securities in safekeeping—Madoff deposited his clients’ money in a retail checking account under the name of Bernard Madoff Investment Securities.
By combining his clients’ money in one pool with no divisions between client accounts, Madoff was able to send out paper statements showing stellar returns without the external verification, transparency and accurate record-keeping a third-party custodian could provide.
Are You Working With the Right Money Manager?
Choosing the right financial professional is a big decision, and asking the right questions can make all the difference. From understanding how they’re compensated to uncovering how your investments will be managed and tailored to your unique goals, knowing what to ask helps ensure you find someone who truly aligns with your needs. Watch this video to learn the key questions to guide your search and gain confidence in your financial future.
Learn More
Finding the right investment adviser for you isn’t just about finding a professional who meets fiduciary requirements—it also means finding someone whose business model, fee structure, custody approach and experience aligns with your goals, values and needs. Need help defining your specific financial goals? Most retirees focus on key priorities like preserving their nest egg, maintaining their current lifestyle, growing their wealth or creating a spend-down strategy. Discover which investment approach can help you work toward these objectives with confidence.
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