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Money Girl
079 MG How to Find an Investment Advisor - Part 1
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This is guest host Andrew Horowitz and today on Money Girl. Some tips on how to find a good investment advisor ripped right out of chapter nine of my book, The Disciplined Investor. This is such an important topic that I've decided to split it up into two episodes. Part one will cover advisor basics. You know what you need to know. And part two will provide tips to finding the best advisor to work with. Protecting your assets from all the potential pitfalls can be a rather trying matter. For many people, enjoying money is much more rewarding than constantly searching for ways to improve the bottom line. For others, it may make better financial or personal sense to focus daily attention on their career, retirement or their family and let a paid professional handle the kind of painstaking research it takes to maintain a profitable portfolio. Fortunately for the many people out there who do not like the idea of braving the waters alone, there is an entire fleet of financial professionals willing to help. The degree and quality of that advice varies greatly. And as this book has stressed again and again, it is important to do your homework. Financial professionals come from many different backgrounds, biases, skill sets, influences and experience. Therefore, it is imperative to assess the kind of investment strategies you are looking for as well as the kind of person you would like to work with. As if you are looking to buy and test drive a car, it is critical that you take the time to size up the benefits and drawbacks of dealing with a particular financial advisor. During your evaluation, there are a few easily recognizable key indicators that the disciplined investor must pay attention to. The following two segments conveniently lump them into two categories, what to avoid and what to look for. Choosing an advisor, what you should know. At the grocery store, most people comparison shop. They are not likely to buy a $2 can of corn from one reputable brand when another equally reputable name is selling for $1.50. Unless, of course, you are dealing with a canned corn connoisseur. In that case, the discerning consumer would more likely buy the $5 can that was imported from Europe. Choosing an advisor is a similar process and carries many of the same potential influences. Know this. When looking for an advisor, you usually get what you pay for. Getting what you pay for in this case has a rather complicated connotation, especially considering that you are not just dealing with varying price tags. This time, you are also dealing with varying pricing structures. It is true that highly regarded experienced advisors tend to charge more than lesser known or inexperienced advisors. It is also true that the method of payment tends to complicate things. Financial advisors earn their income by charging the clients in one of the following matters. Pay per trade, fee only, fee based, and commission based. Pay per trade. This is a term that refers to any advisory practice that charges a rate for the simple act of trading a stock or other investment. The term "pay per trade" actually refers to the kind of online, self-directed investment approach covered in Chapter 8. Some companies employ advisors who may receive a base salary. In addition, bonuses may be based on the many thousands of flat rate trading fees that the company earns every day from the clients that use their services. For the most part, this type of advisor is considered a "broker" and merely assists with your trades rather than providing advice. Fee only. This term refers to the type of advisor that charges a standard hourly fee or a flat amount for his or her service. Think of the way in which one pays a lawyer or psychiatrist. This sort of pay structure may also come with an annual fee associated with the types of investments that you and your advisor agree on. Usually you will pay a percentage of the assets managed for ongoing advice and support beyond the initial consultation. Fee based. This is probably the loosest term in the entire group. Fee based advisors may charge a flat hourly rate plus a fee for managing your portfolio. In addition, investments purchase may pay a commission to the advisor. The degree of those commissions varies greatly between advisors and some firms will actually work in a manner closer to the category of fee only than others. With this arrangement, clients will have the broadest range of investment options available to them. Commission based. Anyone who has ever gone into a shoe store or car dealership knows that salespeople who live exclusively off commissions are nothing short of or letless when it comes to the advice on products or services they represent. If they do not get you to pull out the old checkbook, they do not make any money. It is essentially the same with commission based advisors who are paid only when you implement suggestions that they make on stocks, low to mutual funds, insurance or annuity products. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year in work projects, holiday plans or travel. Planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but policy genius makes the process a breeze. With policy genius, you can find insurance policies that start at just $292 a year for a million dollars of coverage. Some options offer same day approval and avoid unnecessary medical exams. Policy geniuses technology lets you compare quotes from America's top insurers in just a few clicks to find your lowest price. It's the country's leading online insurance marketplace. 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Contact us before canceling entire account to continue bill credits to credit stop and balance and required finance agreements too. eBay Motors is here for the ride with some elbow grease and a whole lot of love. You transform 100,000 miles and a body full of rust into a drive that's all your own. LED headlights, spoilers, whatever you need. eBay Motors has it at affordable prices. And with eBay guaranteed fit, it's guaranteed to fit your ride every time. Keep your ride or die alive at ebaymotors.com. Eligible items only, exclusions apply. In summary, you can determine what to avoid in an advisor by following a few basic rules. The first is that while the online self-directed advisory firm may be great for those who wish to maintain some degree of control over their own portfolios, when it comes time to offer expert advice, they tend to fall a little short. Basically, it is pretty easy to figure out that the advisors working for one of these services, with no commission, a base salary and little motivation to perform well for the client, are not exactly the cream of the crop. The second point is that when dealing with a fee-only advisor, you may find yourself paying for services that you don't really need. Look at a lawyer analogy. Your new attorney is probably not about to take a look at all of your legal documents and tell you that everything is completely in order. Rather, he or she may suggest all of the things that can be improved. Of course, they will take an hourly fee in order to provide the service. Then there are advisors that are primarily commission-based. Imagine for a moment that you are in a mall shopping for shoes. You walk into a well-stocked retail establishment and find that it only sells brown shoes. The pleasant salesman walks over and asks if you need help. Let's agree that you are most assuredly not going to walk out of there with a brand new pair of black shoes. No matter how badly you may want a black pair, the benefits and beauty of the brown shoes will be extolled. Now with that in mind, think about the commission-based planner. If you are working with an advisor whose income is based on the commissions from selling specific investments, how can you ever be certain that what you are buying is not a membership at the Country Club for that advisor? At what point is adding a mutual fund to the portfolio or jumping on a stock become an action that is less in your interest and more in theirs? By process of elimination, the obvious pick out of the group is the fee-based advisor. Typically, these advisors employ a nice blend of all the fee structures. Basically, you will be able to choose which pay structure is best suited for you and the advisor. This gives you the greatest flexibility and control. Apart from the fee structure, there should be additional factors when determining the best advisor for your unique situation. In some capacity, it is important to seek counsel of some kind. Bear in mind that the old saying, "The man who represents himself as an attorney has a fool for a client." Nobody, not even an experienced advisor, has the answers to all of life's old Wall Street questions. Furthermore, almost no one can completely separate their emotions from their own portfolio. This happens to be one of the most important lessons to be learned when dealing with your own money. That is why advisors have a decided advantage. If they gain or lose $5,000 in a day for your portfolio, they are less likely to lose sleep over it. Of course, this is not something to be taken lightly, even with a very large portfolio. Yet, the simple fact of the gain or loss is less likely to dictate the advisor's next move. This is what separates the successful investor from the rest of the pack. In short, the greatest benefit of utilizing an investment advisor in some capacity is to gain objectivity. Portfolio decisions that are based on logic rather than emotion will be much more consistent with your long-term goals. Cha-ching, and that's almost all for now. Next episode, we will explore what you need to know to find an investment advisor that's a good fit. Don't forget to come over and subscribe to my weekly podcast, The Disciplined Investor, available on iTunes. And if you want to become a more disciplined investor, pick up a copy of my book or audiobook, The Disciplined Investor, Essential Strategies for Success. As always, everyone's situation is different. So be sure to consult a tax or financial professional before making important financial decisions. This podcast is for educational purposes only, and is not intended to be a substitute for seeking personalized, professional advice. H5N1 bird flu is spreading in some animals. 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