Seven Guidelines For Choosing An Adviser

September 17, 2010

A week ago, a reader e-mailed asking how to go about choosing a financial adviser.

It’s a difficult question to answer. The choice of a financial adviser is deeply personal, and there are no sure-fire rules. But I didn’t want to leave the reader with nothing, so I wrote down a few “checks” people can use to make sure they are fishing from the right pool.

  1. Fiduciary Duty: There is a huge difference between an investment adviser who has a fiduciary responsibility to his/her clients and a broker who is only required to recommend "suitable" investments. You want your adviser working for your best interests.
  2. Fee-only or Hourly: You don't want your adviser being paid on commissions. Ever. Hourly rates are great, if you can find that. Absent that, a fee-only adviser is fine.
  3. Low Fees: I haven’t seen any formal studies, but I would guess there’s an inverse correlation between fees charged and the quality of money management services among advisers. There certainly is in mutual funds. There’s no reason to overpay: Some of the best advisers I know start their fees at 0.50 percent and scale down from there. Regardless, you want someone with a fee of less than 1 percent.
  4. Fees for Investment Management: To my mind, it makes sense to separate the fees for managing money from the fees for financial planning. Why pay an ongoing fee for planning when you only need a plan examined every few years? And why should your planning fees be the same as someone with a much more complex tax situation? In my book, the fees for money management and the fees for financial planning should be separate. Lumping them into one general fee only causes confusion.
  5. Custody: The best advisers will give you a choice of two or three third-party custodians; some will even do pass-through billings on the cost. That’s the ideal. But at a minimum, you must have a third-party custodian for your account.
  6. Turnover: Ask about annual average turnover in similar portfolios. It should be reasonably low; if not, the manager is churning your portfolio to dubious effect.
  7. Philosophy: Make sure you understand your adviser’s investment philosophy and that it aligns with your way of thinking.

None of these rules is absolute. They won’t guarantee you'll find a great adviser. But as general guidelines, they’ll help reduce the risk of choosing a bad one.


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