Selecting the right investment advisor is very important. It can make enormous life differences, such as retiring on time (and comfortably), affording your kids’ or grandkids’ education, and simply giving you peace of mind so you can sleep well at night. In this report, we review 10 things you should look for in an investment advisor, plus three big mistakes you should avoid. Without further ado, let’s get into it. 

10 Things to Look for in an Investment Advisor:

1. Fiduciary: A fiduciary investment advisor is legally obligated to act in your best interests. That sounds like something pretty basic, and you’d assume all investment advisors are required to do this. Unfortunately, that’s not the case. Some investment advisors are simply investment sales people, and they are held to a much lower standard. Basically, investment sales people have to be able to argue an investment is “suitable” for you without ever really acting in your best interest. If you are going to select an investment advisor, it makes a lot of sense to select one that is a fiduciary.

2. Deep Experience: The world can seem like a very unfair place for smart young people that don’t yet have any experience (i.e. how are you supposed to get your first job if previous experience is required!?). However, when it comes to your nest egg, experience matters, and you should pay close attention to your advisor’s background. It may sound nuanced, but simply working within the investment industry for many years doesn’t equate to investment experience either. Unfortunately, a lot of times people spend years in sales roles or operational roles that don’t involve any actual investment experience. Pay close attention to an advisor’s actual experience, and make sure they demonstrate to you they have to the right competencies to do the job.

3. Matches Your Style: There are about a million different ways to answer the “investment style” question, but from a high level it’s probably a very good idea to go with an investment advisor that believes in disciplined, goal-focused, long-term investing. With the proliferation of content on the internet, it’s easy to get distracted by the get-rich-quick stories of high-speed-trading, the latest exotic cryptocurrency or simply “meme stocks.” We’re not saying you should avoid these things altogether, but keep them in perspective. And at the very least, make sure you understand what your investment advisor invests in, why, and if it matches your personal style and your goals.

4. Fee-Only: Fee-only advisors typically get paid a set rate for the services they provide, and they are preferable to commission-based advisors because it helps avoid conflicts of interest. For example, commission-based advisors get paid for selling certain products, and these products may not always be in your best interest. On the other hand, a fee-based advisor won’t be distracted by lopsided commission incentives and can instead focus on what is right for you.

5. Reasonable Fees: Being a fee-only advisor isn’t enough, and you should be careful to avoid investment advisors that charge unreasonably high fees. For example, fee-based advisors typically get paid a percentage of total assets; and in this regard, it’s generally a good idea to avoid advisors that charge an annual fee greater than 1.0%. Many fee-based advisors will argue that their great skill warrants a fee higher than 1.0%. Don’t fall for their ruse. Higher fees do not equal better investment performance. Higher fees detract significantly from your nest egg over the years. It is greatly preferable to select a reasonable fee-only advisor.

6. Registered: Being appropriately registered as an investment advisor is important. Not only does it subject an investment advisor to important regulatory audits, but it requires them to pass certain qualification exams to demonstrate competence. Further, it allows potential clients to look up their advisor in regulatory databases to provide an added level of confidence. Every registered investment advisor is required to provide potential clients with certain registration documents. Being appropriately registered is critically important.

7. Education: Beyond meeting basic registration qualifications, a solid educational foundation is important. For advisors that may not have studied investments or finance in school (or want to go above and beyond), designations such a Certified Financial Planner (CFP) and Chartered Financial Analyst (CFA) can help demonstrate competence. An investment advisor may sound sharp when you speak with him or her, but demonstrating a solid educational foundation can help ensure critical competencies exist.

8. Third-Party Custodian: It is very important to work with an investment advisor that uses a third-party custodian. The custodian is basically the bank that holds your money and investments. It is uncommon for an investment advisor to not have a separate custodian, but in rare cases it happens, and these advisors should be avoided like the plague. Infamous swindler Bernie Madoff often did not use a third-party custodian (i.e. he had people make checks out to himself or his firm), and this is how his investors got swindled. Examples of third-party custodians include Charles Schwab and Interactive Brokers. Not only do these custodians hold all your money and investments (for safekeeping) but they also provide account logins, reporting and important tax documents.

9. Communication: Communication is very important. For example, it is very important to set expectations prior to working with an advisor with regards to how frequently you will be in contact, and how. Some investors are comfortable simply receiving monthly or quarterly account statements that show how their accounts are doing. Others prefer some regular interaction, such as quarterly or annual meetings. At the very least, an advisor should be accessible so you can pick up the phone (or send an email) and get the type of response you need. Furthermore, advisors may communicate through blog posts, newsletters or other social media. Make sure you are comfortable with your advisor’s level and style of communication and accessibility.

10. Do They Like Their Job?

It may sound like an odd screening question, but whether or not an investment advisor likes his or her job can be a good leading indicator of what is to come. Disenfranchised advisors or unhappy advisors may not give you the attention you deserve. It may also be an indication that an employment change is coming, and this can create bumps in the road for your investment accounts. Getting a feel for an advisor’s level of job satisfaction is important. Generally speaking, if an advisor likes their job and cares about you, that’s a good sign.

3 Mistakes to Avoid When Selecting an Advisor:

1. Conflicts of Interest: Conflicts of interest are dangerous, and they come in a variety of shapes and sizes. The most obvious are sales commissions (whereby an advisor gets paid more to sell a certain product to you) and conflicting styles (whereby an advisor puts everyone’s money in the same high-risk cryptocurrencies and meme stocks that may not be right for your long-term investing style). However, other conflicts to look out for are things like whether or not you are important to your advisor (or does he have bigger clients that get all his attention) and is your advisor actually free to act in your best interest (or does he work for a big firm that is forcing him to invest your account in a certain way). Be on the lookout, and avoid conflicts of interest, when selecting an investment advisor.

2. Hidden Fees and Expenses: Hidden fees and expenses are a red flag when selecting an investment advisor. They come in a variety of shapes and sizes. For example, a fee-only advisor might tell you he only charges 1.0% annually, but if you look under the hood you’ll see he is buying you expensive mutual funds and investment products that layer on an additional 1% to 2% in annual fees. This is simply expensive and unacceptable, yet it happens frequently. In the long-term, your nest egg will thank you if you avoid such expensive shenanigans and work with an advisor that keeps your “all in” expense ratio below 1.0%.

Excessive trading can be another hidden expense that you should avoid. If your investment advisor frequently trades in and out of investments, your account gets hit with small bid-ask spread costs on each trade, and this can add up. It can also lead to short-term taxable gains (if done if a taxable account). Not to mention, frequent trading can be inconsistent with your long-term strategy and prone to errors. Excessive trading is a potential red flag with regard to investment account expenses.

Performance fees can be another unscrupulous tactic used by advisors to get more of your nest egg. For example, they may charge you a flat fee (of 1% to 2% annually), but then also charge you a performance fee of 10% to 20% of your gains (i.e. they keep 10% to 20% of the profits). They use this tactic under the guise that it incentivizes them to seek better performance, but in reality it incentives them to take more risks to get more of your money.

3. Slick Sales People: Generally speaking, it’s a good idea to avoid slick sales people, and to instead focus on competent investors. If your advisor is more concerned with his office space or new suits—that’s generally a red flag.

Unrealistic expectation setting is another slick-sales-person red flag. For example, if your advisor starts promising you that he can avoid market downturns and only capture market gains, he is probably someone you want to avoid. It sounds nice, but the reality is short-term volatility is generally the price you pay for strong long-term gains; and if you cannot afford the short-term volatility, then you probably shouldn’t have your whole nest egg in the stock market. A good investment advisor will help you correctly allocate your nest egg (between stocks, bonds and cash, for example), and he will be realistic when setting your long-term expectations. For instance, when the market goes up a lot, he’ll remind you that the market doesn’t always go up, and when the market goes down—he’ll help you avoid making emotional mistakes.

The Bottom Line:

Selecting the right investment advisor is extremely important because it can have a dramatic long-term impact on your financial wellbeing. The considerations described in this report are intended to be helpful. If you are looking for an investment advisor, and would like to discuss further, please consider our complimentary 20-minute consultation, below.