Carefully Choose the Type of Financial Adviser You Need


Choosing a financial adviser is a critical decision that should be approached with thought and care. Before choosing one, it is important to understand the different types of advisers and know which type you are seeking. A recent Wall Street Journal article offered some good tips.

An investor who wants professional investment advice that is independent of a brokerage firm but wishes to make his or her own investment decisions should consider a financial planner. (Financial planners may assist with a broad array of personal financial matters, not just investments.) Some, but not all, financial planners are fee-only advisers, who are paid by the client alone. They do not buy or sell on behalf of the client and, at least, claim not to receive any commission or benefit from the client’s purchase of any financial product or other investment. Choose a fee-only planner.

An investor who wants to have an investment professional make the investment decisions and manage his or her money in accordance with predetermined investment objectives and risk tolerance should consider an investment adviser. Unlike a fee-only financial planner, an investment adviser is given discretion to buy and sell on behalf of the client and assumes a fiduciary duty to put the client’s interests first.

In choosing an investment advisor to manage money, an investor should first understand that many brokerage firms offer wrap fee programs in which the broker or adviser receives fee-based compensation (like an investment adviser) but argues that he or she does not assume a fiduciary duty to put the client’s interests first. Often this purported disclaimer is unclear and the investor assumes that he or she is doing business with a fiduciary. Whether a fiduciary duty does exist depends on individual facts and circumstances.

A true fiduciary investment adviser assumes fiduciary duties and will provide the client with a Form ADV, which discloses, among other things, whether the adviser receives any compensation other than the client-paid fee. Investors should avoid an adviser that is conflicted by third-party payments for selling financial products.

Investors should generally avoid an adviser that takes custody of client assets. Client assets should be held by an independent, reputable institutional custodian (for example, many advisers use Charles Schwab as the custodian), which issues the account statements. Advisers who have custody of client assets must report that on their Form ADV, because regulators consider it a red flag for potential abuse. Ponzi schemers like Madoff were able to defraud clients because they had custody of client assets and they issued the (fraudulent) account statements.

Investors should also beware of outsized returns ? not just promises of outsized returns, but actual outsized returns. That is because outsized investment returns are generally possible only by assuming substantial risk. In addition, investors should be skeptical of outsized returns for two other reasons: (1) very few, if any, investment managers outperform the market consistently over time; and (2) the purported returns may not be accurate.

Investors considering hiring a portfolio manager should look for an adviser with the Chartered Financial Analyst (CFA) designation and ask to see evidence that the advisory firm’s performance numbers adhere to a set of standards called Global Assessment Performance Standards, or GIPS.

Additional information on how to prepare for meeting with a financial adviser can be found in a Wall Street Journal article by Aparna Napayanan entitled “Meeting with a Financial Adviser? Read This First.”

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.