When it comes to investment advice and/or financial planning, your options are unending. In fact, data from 2018 shows that there are more than 300,000 “advisors” in the U.S. alone1 – and that figure is growing rapidly.
These “advisors” are spread across a myriad of business configurations – from enormous broker-dealers like JP Morgan, to insurance giants like Northwestern Mutual, all the way down to single employee RIAs (Registered Investment Advisor).
Like many high-net worth American families, your priority is to have an advisor that puts your best interest first. This makes it much easier to narrow your search.
It all comes down to the standard by which he or she is required to provide service. In the industry we have two primary standards, a Suitability Standard and a Fiduciary Standard. The technical definitions can be a bit cumbersome, but the explanations below should prove a helpful introduction.
When making investment recommendations, the advisor will ask: “Is the investment among the number of options that could reasonably improve the likelihood of a client’s desired outcome?” A conflict of interest does not bar the firm from proceeding with a recommendation, despite the availability of another investment that may better suit the client.
When making investment recommendations, the advisor will ask: “Is the investment believed to be the best available option to improve the likelihood of a client’s desired outcome?” While it is possible that a conflict of interest may exist, the recommending firm MUST place the interest of the client first and recommend the investment option identified as best for the client.
If you want your best interest ensured from a regulatory standpoint, that means you want to work with a fiduciary advisor. Registered Investment Advisor firms are held to the fiduciary standard while other firm configurations may or may not be held to that standard.
Using the Fiduciary Standard as our starting metric for making a decision, let’s assume you’ve chosen to work with an RIA firm. Even still, there are countless options. As of 2019, there were 12,993 RIA firms in the U.S.2 and that figure continues to grow steadily.
From here, the selection process is less cut and dry and becomes a matter of your perception and feelings about individual advisors. My advice? Have conversations! It goes without saying that you will want to work with an advisor that you can trust, so you’ll need to get to know the person beyond the bio on the website or a recommendation from a friend. Only you can determine if the relationship will be a good fit.
To jumpstart these conversations, I’ve compiled a list of questions below (all of which a competent advisor should be able to answer quickly and confidently).
- How are you compensated? Are you a fee-only advisor, or do you earn commissions for selling products? Or is it a mix of both?
- What sort of costs can I expect to pay in our relationship? I will be paying you a fee, but are there additional fees associated with how you would invest my assets?
- How often do you typically meet with clients and what does that entail?
- (For older advisors) How long do you intend to be with the firm or what is your vision for the future of the firm? When you retire, what will happen to my relationship?
- What does your firm’s succession plan look like? (It is common for smaller firms to be absorbed by larger firms at the time of a key principal’s retirement. You want to be assured of a clear course of action should this ever occur.)
- Use your best judgment here, but it is also important to get to know your advisor personally as you will be sharing an intimate detail of your own life over the course of the relationship. With that in mind, a great trust-building exercise is to understand what sort of things they are involved in beyond their work. Use the bio on the advisor’s website to dig a bit deeper and gain this understanding. There’s no need to dive into deeply personal topics like politics or religion, but “small talk” is key.
While we’ve limited the scope of this exercise to finding an advisor with your best interest at heart, you’ll also want to consider additional factors in selecting an advisor (investment philosophy, services offered, resources available, etc.). My hope is that this offers you a starting point because the foundation of any fruitful financial relationship is trust.