Investors have options when choosing a financial advisor to help them develop and implement their investment plan. Some of these are quantitative differences (how the advisor gets paid) and others more qualitative (personality, trust, integrity, etc.).
Let’s start with the quantitative decisions. Advisors generally fall into one of two categories, but some fall into both. The first category is “fee-only advisors”. These advisors maintain an agreement with their clients that specifies the rate of compensation for services. The services may be billed at a flat rate, or more commonly as a percentage of assets under management. These advisors are normally registered investment advisors that are required by federal and state regulations to disclose all conflicts of interest to their clients up-front. These advisors do not sell financial products for transaction-based or commission-based income. The fees paid directly by their clients are the sole source of income.
Transaction or commission-based advisors make money as financial products or securities are bought and sold by their clients. They may also have some assets being managed in a fee-based manner as described above, but cannot label themselves as “fee-only” due to the commission based income they receive. There are more potential conflicts of interest in a transaction based relationship, and unlike registered investment advisors, the commissioned broker does not have an obligation to disclose these conflicts up-front.
There are good and bad advisors in each of these categories and the advisor's disciplinary history can be checked out at http://www.sec.gov/investor/brokers.htm. Perhaps more important than the method of compensation in the relationship with your advisor are the qualitative factors. A very high level of trust is necessary for the long-term success of your partnership. Trust emanates from your level of confidence that the advisor is acting in your best interests at all times, and preferably placing your interest before his or her own. This fiduciary attitude should allow for peace of mind and a lower level of stress as the financial markets become volatile from time to time.
Fiduciary: A legal obligation of one party to act in the best interest of another. The obligated party is typically a fiduciary, that is, someone entrusted with the care of money or property. Also called fiduciary obligation.
I think it is important to keep in mind that successful financial advisors make a good living. While no one wants to pay more than necessary for advice, you should not expect to pay rock bottom fees for portfolio management and then expect to receive five star service and response. There is a middle ground on the fee and service continuum; you need to determine the level of service and care you desire, and then find the appropriate advisor who will meet your price demands.
There is a great website with articles, videos and workbooks that can help you structure your search for the best investment advisor for you. Visit www.riastandsforyou.com to obtain these free resources.
In summary, I believe you should first select the advisor compensation model (transaction-based or fee-based) and then search for a firm or individual advisor that fulfills the trust relationship and pricing structure you desire.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.