How to Choose a Financial Adviser

What you need—and don’t need—in a financial adviser.

I’ve been in the wealth management business since 1999 and have learned a few things about the industry that are important for everyone to understand in order to become a smarter investor.

You can do it yourself.

I know a lot of rich people that manage their own money. They are smart and they spend a lot of time doing research, determining where they think we are in the economic and business cycle, which sizes, style and sectors should perform well over the next 12 to 18 months, selecting managers or passive investments, shaping and rebalancing asset allocations, and monitoring performance.

This approach takes a lot of time and money, just like, for example, learning to be an at-home gourmet cook. If I wanted to be a gourmet cook, I’d go take classes, renovate my kitchen, and spend a lot of my time going to specialty grocery stores and coming home early from work to make that “perfect” meal every day.

Or I could outsource it to an expert by going to a great restaurant, and enjoy the meal without doing any of the prep work, presentation, or clean up.

There is nothing wrong with either scenario—it’s a matter of personal interests and how you choose to spend your time.

Have a fee-based adviser.

If you choose to hire a professional to manage your money, it’s best to have a fee-based arrangement for the core of your portfolio management. The best example of this is for equity management where securities are often rotated and rebalanced.

Why? Because when an adviser is compensated as a percentage of assets under management, they get a raise when the asset values go up and take a pay cut when the asset values go down. Additionally, there’s no incentive for them to buy and sell investments for a commission. Advisers who operate on a commission model make money through the execution of the actual transaction, regardless of whether or not the client makes money on the trade.

Have a commission-based adviser.

Wait, what? I thought you just said…There is nothing wrong with paying a commission when you are buying something you want. Items people buy everyday are marked up by the sellers—books, electronics, food, beer (especially in a bar), and other items. There are some very good reasons to have some commission-based investments. Buy-and-hold investments are a perfect example of this.

If your asset allocation calls for a portfolio of bonds to be held until they mature, it is best to pay a commission to buy them and then simply hold them. It makes no sense to pay an annual management fee for a portfolio of bonds that you will simply hold and collect interest. (There’s no management!)

Buy-and-hold commissions are fine and probably even more cost-effective for the investor. But when you’re constantly buying and selling, commissions are not a good idea because the advice is probably conflicted.

Pick an adviser who manages money on a discretionary basis.

Your equity management should be done under a fee-based arrangement. In addition to that, choose an adviser who calls the shots. This means he will not call you when it’s time to sell X and buy Z, he will simply do it. And that is a good thing. The minute you force your adviser to call you and sell you on what they know is the right thing to do for the portfolio, you have turned a practitioner into a salesman. You hired them for their expertise so let them do their job.

Evaluate your adviser on their overall ability to meet the goals and objectives you have outlined in a complete and comprehensive financial plan. If they are not managing the overall portfolio to your liking or it is not performing according to the plan, simply fire them. But don’t force them to “sell you” on every move they know is right. You hired them, ostensibly, because they are professionals.

If you think you need to judge and approve their every move, then you are smart enough to manage your own money.

In the meantime, tell me how it’s going next time you see me at my favorite restaurant.

David B. Armstrong , CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America’s Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010 based on assets under management) and has been interviewed by several national media sources over the past several years. David and Monument Wealth Management can be followed on their blog Off The Wall, their Twitter accounts @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.

Fee-based Advisory accounts are charged a management fee on a quarterly basis based on the value of the assets in the account at that time.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The S&P 500 index is an unmanaged index and cannot be invested into directly. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. International investing involves special risks not associated with investing solely in the United States, such as currency fluctuation, political risk differences in accounting and the limited availability of information, and may not be suitable for all investors.

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