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Choosing an Advisor

Suggestions for selecting an advisor

Define your objectives

What to expect from an advisor.

Decide what services you need

      Before contacting potential advisors its a good idea to know in advance what you are expecting from an advisor. Make a list of expectations to go along with you financial goals. An advisor may not be able to help you if they don't know what you want. Its your own responsibility to make sure that you've provided an advisor with the information they need to advise you appropriately. When asked what they most want from a financial advisor, 83% of consumers listed education first, according to a survey of 4,000 households by Dalbar Inc. 80% said Minimize taxes, 70% said highest returns, 68% said protect from loss, 68% said prevent mistakes, 64% said written plan, 63% said help define goals, 58% said change investments. (Source: LA Times October 13, 1996)

Make a list of candidates

      There are many types of advisors. Banks, Stock Brokers, Money Managers/Registered Investment Advisors (RIA), and Financial Planners are all potential advisers for your investments. See Investment Advisers: What You Need to Know Before Choosing One from the SEC and Now Everyone Has Plans For Your Money from Business Week (9/2/96).

Conduct interviews

     The following is a collection of questions you may want to use in evaluating advisors and their organizations. You can choose any that you feel are relevant to your needs (or you can ask all of them if you're looking for weaknesses or trying to get rid of an advisor that will not leave you alone).

Check credentials and references

Investigating Advisors
See Brokers for researching Stock Brokers.
You can call the CFP Board of Standards (303) 830-7543, ext. 219 to check on license and disciplinary record of Financial Planners.
See also The National Association of Personal Financial Advisors and NAIC.
Call (202) 737-0900 to get state securities commissioners phone numbers.
You can call (800) 732-0330 SEC to see if an advisor is a licensed RIA (See below).

Credentials Information

Choose an Advisor

      When you choose a doctor, you want someone with the appropriate credentials as well as good bed side manner. Likewise, with choosing a financial advisor you should select an advisor that you feel comfortable with both personally and professionally. You also should be confident in the advisors morals and ethics. In that regard you should be aware of how they are compensated. Money management clients typically pay a percentage of assets under management. The managers compensation is not based on the commissions generated on trades. The manager has no incentive to churn but does have an incentive to grow the assets, thereby growing his own income. The managers incentive is therefore in line with the clients and in the clients best interest. Less than ethical practices that do exist include accepting kickbacks from brokers for using the brokers products, and undisclosed self-dealing with an affiliated broker. Stock Brokers historically were compensated by commissions, but percentage of asset based accounts have become more common (See The Trust Issue). See also "New study finds most 'fee-only' financial planners misrepresent how they get paid" in Money Daily (1/10/97).

Behavior by managers you may want to avoid.

      Behavior that can work against the client is behavior that is likely NOT to lose the business of a client. A manager may be excessively risk averse and liquid by not allowing enough risk therefore resulting in lower returns. By simply matching the market or not straying far from a benchmark, a manager can reduce the risk of significantly underperforming and getting fired. This behavior can occur typically when an advisor has performed well in the recent past. An analogy can be drawn to a football team with a large lead near the end of a game. They play a "prevent defense" which prevents big plays but allows short and medium gains that will run the clock out. Likewise a manager is unlikely to be fired for slight underperformance, therefore taking few risks may reduce the likelihood of losing an account in some cases.

      In contrast, a manager that has significantly underperformed may also exhibit behavior that is not in the clients best interest. What does a quarterback do when he's trailing at the end of a game and his back is against the wall. He throws the bomb. Similarly, managers that have underperformed will be tempted to take additional risk in an effort to catch up. A manager on the verge of getting fired may take larger risks since he/she is likely to get fired anyway. Throwing the bomb may be his last chance to keep a client. See Of Tournaments and Temptations, an interesting Journal of Finance article that discussed mutual fund fees and how fund managers act depending on their performance.

"There are no requirements for managing billions of dollars, but before somebody can trim your sideburns, he or she has to pass some sort of test. Given the record of the average fund manager over the last decade, maybe it should be the other way around."
     Peter Lynch, Beating the Street


Tribune Media Services. All Rights Reserved. Reprinted with permission.

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