Selecting the Right Advisor for You

Recommendations from family, friends and co-workers are a great resource for finding potential investment advisors. But don’t let a strong referral be your only selection criteria. You should consider many factors -- including personality, experience, qualifications, investment activities, and business style -- when choosing an investment advisor.

Personality and Character

Your relationship with your investment advisor will include discussion of intensely personal issues: your financial accomplishments and shortcomings, your hopes and fears for the future. By sharing this information with your advisor, he or she will be better able to help you achieve your goals. If you do not feel personally comfortable with your investment advisor, you may hesitate to be open about these important issues, which may in turn sabotage the success of your investment strategies.

By asking an advisor how he or she operates and about his or her background, you accomplish more than just information gathering. You also establish a dialogue that lets you explore how well you might communicate with each other in the future.

It can be difficult to gauge how compatible you are likely to be with a potential advisor. In your initial meeting with a prospective advisor, he or she is certain to be very conscious of the need for exemplary behavior. Take special notice if an advisor is discourteous, abrupt or evasive at this stage.

There are also several indirect ways to gain insight into an advisor’s personality. Ask the advisor for anecdotal examples of how he or she helped another client with a specific problem. Listen to how the advisor describes other people and their needs. Watch the advisor’s body language. Notice how the advisor’s office is decorated and how he or she dresses. If possible, pay close attention to how the advisor interacts with other people. All of these are valuable clues to the advisor’s character and personal style, and to whether you would feel comfortable working with him or her.

Experience, Education and Qualifications

The investment advisor will likely give you at least one background sheet or brochure that describes his or her background in some detail. If any part of that information is unclear to you, ask the advisor for clarification. By the time you have reviewed his or her informational materials and spoken with the advisor directly, you should have collected answers to at least the following questions:

1.       What experience do you and your company have in the investment industry?

2.       How long have you and your company been investment advisors?

3.       How did you become an investment advisor?

4.       How many clients do you currently serve?

5.       How many dollars of assets do you currently invest or manage?

6.       What is your educational background?

7.       What professional credentials do you have (such as CFP, ChFC, CFA, CPA)?

8.       What professional organizations are you a member of?

9.       What state and/or national oversight agencies are you registered with?

10.   Have you ever been sued by a client or fined by a regulatory agency?

Investment Activities and Business Style

You need to be certain that you understand what investment services an advisor provides and how clients are served before you hire him or her. It is pointless to hire an advisor who does not offer the investment services that you need, regardless of how well you get along together and how well qualified he or she is. You should have the answers to the following questions before hiring any investment advisor:

1.       What types of investment activities do you offer? What types of investment activities do you personally handle most often?

2.       How are you compensated (fee-only, fee and commission, or commission only)?

3.       If fee compensation, what services are included in the fee? What other potential fees might be incurred?

4.       If commission compensation, will you disclose the commission rate or dollar amount on each recommended financial product?

5.       How do you educate your clients about the investment process and their specific investments?

6.       How will you diversify my portfolio?

7.       What long term results have you achieved? What results in up markets? Down markets?

8.       What types of reports will I receive on my investments? Containing what information? Delivered how (mail, online, etc.) and how often?

9.       Who do I contact if I have a question or a problem with my investments through you?

Other Factors

Working together: Consider how you will physically interact with the advisor – will most of your contact be face-to-face, by telephone, by e-mail? Are you comfortable working with an advisor in that way? Do the advisor’s working hours fit your schedule? How accessible is the advisor if you have a question? How easy will it be to handle any paperwork that you must review or sign?

Chemistry: Do you like the advisor as a person? Would you feel comfortable working with him or her? Do you trust his/her judgement and desire to help you?

Communication: Does the advisor explain things in a way that you understand? Does he or she listen to you and try to understand your needs and concerns? When you talk with the advisor, do you seem to be “on the same wavelength” or at cross-purposes?

Stability: Is the advisor likely to be available if you need additional help in the future? What would happen if the advisor retired or unexpectedly became unable to work?

Evaluating Responses

For most of the questions above, there is no one right answer. You will have to decide for yourself whether the answers are right for you and your situation. For example, you may not feel comfortable working with an advisor who is compensated solely by commission. Or, you may prefer a commission-only advisor. Similarly, you may only want an advisor with an advanced degree or specific professional designations or a minimal level of experience.

You should also ask yourself if you are satisfied with how the advisor answered your questions, beyond what was said. The advisor might seem too “pushy” or too “wishy-washy” for your taste. Or, the advisor might offer too many or too few details in his or her answers to your investment questions. These are matters of personal preference, affecting an advisor’s suitability for working with you, without reflection on his or her abilities.

If you felt the advisor was evasive in his or her responses, or tended to misunderstand the questions you asked, you would probably feel more comfortable working with another advisor.

Verifying Information

There are several independent sources that you can use to confirm the qualifications of an investment advisor:

1.       One common way to check out an advisor is to ask for client referrals, and then call those referrals. Ask them just two or three questions, but not ones that can be answered with a simple yes or no. For example, “What do you like best about working with (advisor)?” or “How does (advisor) compare with other financial advisors you’ve worked with?”

2.       If your candidate is a Registered Investment Advisor with the Securities and Exchange Commission (SEC), he or she must file an annual Form ADV to maintain that status. He or she is required to give Part II of the Form ADV to any person who requests it. (Many routinely give this form to prospective clients.) This form is a gold mine of information about the advisor and his or her business, including services offered, types of clients served, analysis and reporting methods, educational and business backgrounds, industry activities and affiliations, and detailed fee/compensation schedules.

3.       If the advisor has a professional designation such as CFP, ChFC, CFA, or CPA, you can contact the governing bodies that control these designations to learn if the advisor has any violations, fines or complaints.

4.      If your community has a local Better Business Bureau or similar registry for consumer complaints, you can call or write to learn if there have been any complaints filed against the advisor. If the advisor is new to your community, you might also call the Bureau in the area where he or she previously worked.