How to Choose an Investment Advisor

Hiring someone to help manage your investments is every bit as difficult and as critical as hiring employees at work. You will not get it right 100% of the time, and it will cost you money as a result.

Having said all that, I’ve put together a guide based upon my cumulative experience in this area. Stick to it and you should be able to gather a lot of good information for comparing advisors prior to your selection.

Just like hiring employees, the keys to selecting a financial advisor are to ask the right questions, and to have more than one candidate (I think three is a bare minimum).

To start with, here are a few recommendations:

• Integrity is the single most important factor in choosing and investment advisor. You must be able to trust this person’s integrity as much as your doctor’s, because both individuals have your future in their hands.
• You should be brutally honest about your complete financial situation and goals.
• When you are unsure about something, you must question it until you understand it fully. Simply “trusting” your advisor is doing them a disservice since if you are unhappy later because you didn’t understand, it hurts everyone.
• A good advisor wants to teach you. They want you both to be on the same page and to share a common understanding. This is how they add value, and it’s their job.
• Depending on your level of wealth, rates are highly negotiable.
• Advisors should always, always, always disclose their fees and commissions to you. There is nothing wrong with them getting paid, this is how they feed their family, but you should question if there are lower cost / commission options available for every decision you make. If the higher commission option is really most appropriate to your situation your advisor should be able to convincingly spell out why.
• Finally, if you ever feel funny about something, or begin to even slightly doubt your advisor’s integrity, go through the entire process of finding another. Your first duty is to protect your family and assets, and diligence is the price you pay.

Below is a general format for information to provide to a prospective advisor. This should answer many of their questions in advance and help them prepare the best proposal to earn your business.

ABOUT US:
We have X adults in the household and X children.
All financial planning, reporting and Web interfaces must be integrated to show the totals combined (with a single login for the Web).

Income Sources:
Jane will earn at least $XXk annually.
Dick will earn at least $XXk annually.

Expenses:
We currently have the following loans / debt:

• Home Mortgage – $XXX,XXX
• Vehicle 1 – $XX,XXX
• Vehicle 2 – $XX,XXX
• Credit Card – $X,XXX

We spend around $X,000 monthly.
We wish to save / invest the excess.

Assets:

• $XXXXX in investment assets
• $XXk in home equity

OUR FINANCIAL MANAGEMENT REQUIREMENTS:

Our primary interest is in working with a true Financial Advisor. We expect our advisor to promise to find the lowest-cost funds and best of breed investments, and to give us the best holistic financial advice:

• We want an advisory account, not a brokerage account.
• We expect acknowledgement of a fiduciary responsibility to act in our best interests.
• We expect disclosure of all conflicts of interest.
• Advisory team members need to have excellent resumes with appropriate educations.

We want to have quarterly holdings reviews with our financial advisor. These reviews should include the following at a minimum:

• Compare starting and ending balances for the quarter.
• Present growth statistics in both dollars and percentages, with comparisons to benchmarks.
• Disclose all fees. We want to have constant visibility of the fees we are paying.
• Analysis regarding how the investments are positioned, where we need to rebalance, how our level of risk is looking, etc.
• Technical justifications for any item in our portfolio.

We want to see full financial planning models which provide long term projections of our wealth given a number of different variables:

• This model should be updated annually at a minimum.
• We prefer this model to be built into the Web interface so we can manipulate the numbers ourselves.

We are particularly interested in tax efficiency. We do not want to see lots of trading activity that causes us to have high returns with huge tax implications.
We are most interested in the bottom line, but all things equal we want to pay less tax.

We require responsiveness:

• We don’t call often, but when we do we expect that calls will be answered. If we don’t reach our advisors by phone we expect same day return calls.
• We expect cell phone numbers and/or blackberry addresses of our current advisors and bankers for emergencies.
• We expect same day return e-mails.
• We expect that service requests will be completed in a timely manner.

We do not want paper statements mailed. We want everything done online for security reasons. We take the threat of identity theft seriously, and sending documents through the mail to be left in our mailbox is inherently insecure.

We require timely and comprehensive tax reporting.

OTHER INTERESTS:

We desire a comprehensive, feature-rich, Web site which integrates all accounts:
Investments

• Checking and savings
• Credit cards
• Lines of credit

We may require business accounts and lines of credit:

• Business checking
• Business credit cards
• Line of credit

We are interested in attending occasional events coordinated by our managers which involve education or networking.

I would recommend starting with the large investment firms first before considering a local independant advisor because they have more resources and generally greater oversight. Firms to consider include:

• Smith Barney
• Merrill Lynch
• Schwab
• T. Rowe Price

If you happen to have investable assets greater than $1 million, you need to specifically look at the High Net Worth management groups. Do not talk to anyone else. These special groups only handle clients with over $1M and normally have no more than 200-300 clients. They also have many options not available to normal investment advisors.

Finally, here is what the SEC has to say about hiring Investment Advisors. It is important that you also review their information as there are items I haven’t covered.