Picking an Investment Advisor: Investing your hard-earned money is a crucial step toward building long-term financial security. Whether you’re saving for retirement, a home, or your children’s education, the right investment strategy can make all the difference. While many investors take the DIY approach, some prefer to work with an investment advisor to navigate the complex financial landscape. But how do you pick an investment advisor who truly has your best interests in mind?
A significant challenge for many investors is the fact that not all financial advisors are incentivized in ways that align with your success. In many cases, advisors are paid a salary and earn commissions based on the investment products they recommend, regardless of how those investments perform for you. This misalignment of incentives can result in decisions that benefit the advisor or the firm they represent more than they benefit you.
In this guide, we’ll explore how to choose an investment advisor who is aligned with your financial goals, what to watch out for, and how to do your own research before committing to any advisor.
Understanding Incentives: Aligning Your Success With Theirs
One of the first things to understand when selecting an investment advisor is how they are compensated. In many cases, advisors are paid a salary and commissions based on the financial products they recommend. This means their paycheck isn’t necessarily tied to how well your investments perform, but rather to how many products they sell. Unfortunately, this model can result in conflicts of interest.
The Commission Trap
If an advisor earns a commission for selling specific investment products (mutual funds, insurance policies, etc.), they may be incentivized to recommend products that generate more income for them—even if they are not the best choice for your portfolio. Always ask your advisor how they are compensated and whether they receive commissions for selling certain products. You should aim to work with an advisor whose compensation is directly tied to your success, such as a fee-only advisor.
Fee-Only vs. Commission-Based Investment Advisor
- Fee-Only Advisors: These advisors charge a flat fee, an hourly rate, or a percentage of the assets they manage. Their income is tied to the size and success of your investments, which aligns their incentives with your best interests.
- Commission-Based Advisors: These advisors earn money by selling specific financial products. They might push you toward high-fee mutual funds or annuities because they make more money from them, regardless of how these investments perform in the long run.
For many long-term investors, a fee-only advisor is often a better option because they have a direct stake in your success. Fee-only advisors are more likely to focus on long-term growth and risk management, rather than churning your portfolio to make commissions.
Beware of Hidden Fees
Even within fee structures, you must be vigilant about hidden costs. Some advisors charge for services you may not need or include ongoing fees that eat away at your investment returns. Ask for a clear fee schedule and demand transparency about every potential cost before agreeing to work with an advisor.
Investment Advisor: The Importance of a Hands-On Approach
An investment advisor shouldn’t just be a salesperson; they should be a partner in your financial journey. The best advisors take the time to understand your individual goals, needs, and risk tolerance. This means learning about your current situation, future goals, and how much risk you are willing to take with your investments.
Personalized Financial Planning
Your advisor should provide you with a customized financial plan that outlines how you can achieve your goals, whether that’s buying a home, saving for retirement, or sending your children to college. A good advisor will also review and adjust this plan regularly based on changes in the market or your personal circumstances.
If an advisor seems more interested in getting you to sign on the dotted line than in learning about your unique financial situation, that’s a red flag. You want someone who is willing to ask questions and genuinely listen to your answers. The more information they have about your financial life, the better they can serve you.
Continuous Education and Certifications
The financial world is constantly evolving, and it’s crucial that your advisor stays up to date with current trends, regulations, and best practices. However, not all advisors are incentivized to continue their education, especially those working at large banks or institutions.
Banks and large financial institutions often provide minimal training to get their advisors up and running, then push them to sell the bank’s financial products. After that, continuing education may not be a priority. This can be a significant disadvantage to you as the client because the advisor may not be familiar with new investment strategies or regulations that could affect your portfolio.
When interviewing potential advisors, ask them about their continuing education efforts. Look for credentials like CFP (Certified Financial Planner) or CFA (Chartered Financial Analyst), which demonstrate a higher level of expertise and a commitment to staying current with industry standards.
Watch Out for Conflicts of Interest at Banks
When it comes to working with advisors at large financial institutions or banks, you must tread carefully. Many banks hire advisors who are essentially salespeople, and their primary goal is to push products that benefit the bank, not necessarily the client.
Bank-Employed Advisors: Selling You More Than Investments
Bank-employed advisors often receive incentives to recommend the bank’s lending services—mortgages, credit cards, lines of credit, and other debt products. While these services might be beneficial in some cases, they are also a significant revenue stream for the bank. Advisors at banks may prioritize selling these products over sound investment advice.
If you’re serious about building long-term wealth, taking on unnecessary debt will hinder your financial progress. It’s essential to be cautious of advisors who seem more interested in signing you up for a new mortgage or credit card rather than helping you achieve your investment goals.
Beware of Proprietary Products
Banks and large financial institutions often develop their own financial products (mutual funds, ETFs, insurance policies, etc.) and instruct their advisors to push these products over others. These proprietary products may carry higher fees or lower returns than similar products from other institutions. Even worse, they might not be the best fit for your investment strategy.
Before investing in any proprietary products, ask for a comparison with similar options from other institutions. If the advisor is unwilling to provide this information or pressures you to invest in the bank’s products, you should consider looking for a more impartial advisor.
How to Do Your Research on an Investment Advisor
Choosing the right investment advisor isn’t something you should take lightly. Here are some key steps to follow during your research:
1. Check Their Credentials
As mentioned earlier, the best advisors will have credentials that demonstrate their commitment to high ethical standards and ongoing education. Look for designations such as CFP, CFA, or CPA (Certified Public Accountant). These certifications require rigorous training, exams, and adherence to ethical guidelines.
Additionally, you can verify their credentials through databases like:
- FINRA’s BrokerCheck: This tool allows you to see an advisor’s employment history, certifications, and any regulatory actions or complaints.
- SEC Investment Advisor Public Disclosure: This provides information about the advisor’s firm, including their track record and any disciplinary actions.
2. Understand Their Investment Philosophy
Ask potential advisors about their investment philosophy. Are they focused on long-term growth, value investing, or active trading? Ideally, you want to align with an advisor who focuses on buying and holding quality investments and minimizing unnecessary risk—especially if you’re looking for sustainable, long-term wealth accumulation. Advisors who promise fast returns or use a lot of jargon to describe their strategies may not be the best fit.
3. Ask for Client References
A reputable advisor should be willing to provide references from clients who are in a similar financial position to yours. This will give you a better idea of what to expect when working with them.
4. Look for a Fiduciary
An investment advisor who is a fiduciary is legally required to act in your best interests. This is crucial because non-fiduciary advisors are only held to a suitability standard, meaning they can recommend products that are “suitable” but not necessarily the best for you. Working with a fiduciary ensures that your advisor is putting your financial well-being first, not their commissions or employer’s profits.
Investment Advisor: Warning Signs to Avoid
To protect yourself from making a poor choice, keep an eye out for these red flags:
- Lack of Transparency: If an advisor is vague about fees, commissions, or conflicts of interest, consider it a warning sign.
- Pressure Tactics: Beware of advisors who try to rush your decision-making or push you toward high-commission products.
- No Track Record: Avoid advisors who cannot provide evidence of past performance or references from satisfied clients.
- Too Good to Be True Promises: If an advisor guarantees returns or offers you “can’t-miss” investment opportunities, it’s best to walk away. Legitimate investing always carries some level of risk.
Conclusion: Choose You Investment Advisor Wisely, Your Future Depends On It
Selecting the right investment advisor is one of the most important financial decisions you will make. By doing thorough research, asking the right questions, and being aware of potential conflicts of interest, you can find an advisor who will help you grow your wealth in a sustainable, ethical way. Remember, your advisor should be successful when you are successful. Their primary goal should always be to help you meet your financial objectives, not to pad their commissions.
Happy investing!