Why Contact Us

Frequently people will interchange the terms “Registered Investment Advisor” (RIA) and “Broker/Dealer” when discussing a person they work with on their investments. The services they provide overlap, but you should understand a very important distinction between the two. In brief, a financial RIA is required to act in the investor’s best interests, while a Broker/Dealer is not.

A registered investment advisor – someone who has registered with the U.S. Securities and Exchange Commission or their home state regulatory agency – has a “fiduciary” duty to put the client’s interests first and not their own financial gain. In general, a fiduciary must take the highest standard of care with a client’s assets, placing the client’s interests above their own financial interests at all times.

Brokers/Dealers are held to a “suitability” standard, a much lower standard than fiduciary. They are required to have “reasonable grounds for believing that the recommendation is suitable” for their client, according to the Financial Industry Regulatory Authority (FINRA ). But the broker’s suggestion could also be influenced by commissions he might receive on the sale of any particular investment product.

Ask the professional whom you’re interviewing if he or she is a fiduciary. If the answer is no, then ask about possible conflicts of interest. If the person works for a firm instead of independently, there could be times when they are motivated to place their employer’s welfare before yours. The fiduciary versus suitability standard might not be a concern, depending on the level of guidance you need. You may have the know-how, the willingness and interest to manage your investments and the time to do it. The question is, do you want someone to design and manage an investment strategy for you, or just a person to talk to about investment ideas that you’ll implement yourself?

Before you sign any contracts with an Advisor, be clear about how he’ll be paid as, given human nature, it certainly will have a bearing on your working relationship. If he’s compensated strictly by product fees such as commissions, then he makes money when you buy investment products, and therefore he will likely show you a lot of products – possibly only those products that generate high commissions for him. Will he be offering advice that is truly in your best interest or simply the most profitable product he can sell?

The most client-friendly compensation plan is a fee-only model. The Advisor charges an hourly rate, a percentage of assets managed, a flat fee, or a retainer for his advice and continuing management. No other payment is made from another source and, therefore, conflicts of interest are minimized. Under a fee-based compensation scheme, Advisors charge clients a fee for their guidance, but sometimes are paid for products they sell or recommend. While the Advisor could still be working on your behalf, outside compensation can diminish her ability to keep your best interests at the forefront.

When discussing the Advisor’s compensation model, ask about the total amount of fees and expenses you could expect to pay each year, including Advisory charges, investment management fees, transaction fees and custodial fees. A range of costs, as opposed to a specific number, would suffice. But if she’s unwilling to provide either, beware! After you become a client, ask also for an annual summary of fees. The investment business is one in which clients do not often get receipts.

Finally, find out if the Advisor receives any referral fees from related professionals such as lawyers, accountants, or insurance agents. You may eventually need the assistance of such people. If the Advisor recommends you to another professional, does he receive a finder’s fee? If so, that’s a conflict of interest that should be considered. Has he referred you to the person who is most able to meet your needs – or the one who pays him the largest fee?

A major part of investing is identifying goals, your time horizon for realizing those goals, and understanding yourself as an investor. Specifically, how willing are you to risk your hard-earned money? Do you have the stomach to handle market swings, or will you lie awake at night worrying about market volatility? It’s a critical process that a good Advisor will help you navigate. One widely used approach is a risk assessment survey. It might include questions to find out how aggressive you want to be with your investments, what your saving habits have been, and how you react to market events. (For example: When the Dow fell more than 700 points in 2008, were you shouting to your broker to sell?)

But you also want a discussion about your financial goals and her risk management. She should help you prioritize objectives that might include retiring at a certain age, buying a second home, sending your kids or grandkids to college, buying a business or starting a business. Given the size of your portfolio, does your Advisor think you are likely to achieve your financial goals? Which goals are you most likely to achieve? What is the best use of an extra dollar you might have to invest?

Additionally, your financial goals can and will change over time. Owning a second home might become impractical. Your interest in buying a business could wane. You may receive an unexpected inheritance. How frequently will the Advisor speak with you to update your objectives? More specifically, how often will the Advisor initiate a discussion with you about your goals and their relative priority? It should be at least once each year. (However, planning for your financial future is a two-way process, and it is your responsibility to notify your Advisor about significant changes to your situation that affect your investment strategy.) Ask if he has any clients similar to you that you can call for references. It’s important that your Advisor have experience working with people with similar assets, concerns, and financial goals and not just clients with stratospheric wealth whose issues are very different than yours.

It’s a trite saying but a true one: in investing, time is money. The time you lose while your plan flounders is time you won’t get back. Advisors can’t guarantee performance, but they will be able to stay current with your investments, consider factors that might influence performance, and make adjustments before you veer too far off course.

When completing a financial plan, Monte Carlo can be a useful tool to help you understand the likelihood of a range of outcomes. Note that many Advisors use Monte Carlo analysis as a marketing tool. However, re-rerunning the Monte Carlo analysis can be a useful exercise and should be done at least every other year or when your financial situation changes significantly.

After you’ve discussed your financial goals and reviewed your assets, you need to know how those assets will be allocated. Asset allocation refers to the diversification of your portfolio across different asset classes – namely equities, fixed income, cash, and perhaps “alternative” investments.

Asset classes have different risk and return characteristics, and part of the work of a financial Advisor should be determining which mix of assets is most likely to help you reach your financial goals. Determining your asset allocation is one of the most important investment decisions, as time-tested studies have shown that the stock/bond ratio accounts for the vast majority of the change in portfolio value over time.

Your asset allocation should be based on several factors that are specific to you, such as the purpose of the portfolio, the time horizon of goals, cash flow requirements, liquidity needs, and tax considerations.

A good investment RIA should have a philosophy about the best way to implement her asset allocation; that is, which specific instruments or managers the Advisor will use to “put the portfolio to work.” Generally, does she believe in active or passive management, or a combination of both?

Active managers try to consistently “beat their benchmarks.” Commonly referenced benchmarks include the S&P 500 Index and the Barclays Aggregate Bond Index. Active managers are striving to generate “alpha,” return in excess of the benchmark return. That’s very difficult to accomplish in a consistent manner, but some portfolio managers manage to do so.

Passively managed funds are designed to match the performance of a benchmark and usually have lower annual management fees. Index mutual funds and exchange-traded funds (ETFs) are two common passive investment vehicles. Given that they track the market, passive funds are “beta” investments.

Regardless of a preference for active or passive management, ask how the advisor evaluates investment opportunities and managers. What are the benchmarks he uses to evaluate portfolio returns? Against which peers does he compare an active manager? What data sources does he use to select and monitor managers? Whatever the strategy, be certain it’s something you understand and agree with.

Not all investing decisions work out. A good Advisor is forthcoming about mistakes, able to learn from them, and willing to discuss them. It’s wise to ask about plans that fell short or flat-out flopped. The explanation should be more than “it just didn’t perform as expected.” There is no one suitable answer. Investment Advisors are the captains of your investing team. Sometimes the other players don’t do their jobs. The managers of a mutual fund he purchased years ago may have changed, affecting the fund’s results. Or a fund manager might say he follows a certain strategy but doesn’t do so faithfully, which results in “style shift.” So that investment manager who was supposed to be investing in large cap U.S. equities now owns the stocks of smaller international companies.

Separate from the Advisor’s fee, but crucial to the impact on your portfolio, are taxes you will pay on your investments. For an investor who pays taxes, what matters is not gross returns, but rather what goes into your pocket after all taxes and fees are paid. According to a study by Morningstar for the period 1926 to 2011, a hypothetical stock return of 9.8 percent shrank to 7.7 percent after taxes, leaving the investor with 2.1 percent less investment income in hand.

Ask about the tax consequences of the Advisor’s plans to manage your investments. Does he avoid unnecessary short-term taxable capital gains by holding assets at least a year, absent a compelling investment reason to sell? Does he practice “tax loss harvesting” by methodically selling investments to offset realized capital gains?

Obviously, an investor does not pay taxes on investment activities in individual retirement accounts (IRAs) and other tax-deferred accounts. If you are investing both taxable and tax-deferred accounts, “asset location” becomes relevant. Ask the Advisor, “how do you decide which investments to buy in my taxable account versus my IRA ?”

You want an Advisor whose “system” includes at least one independent third party to provide checks and balances. Ideally, one firm will design and implement your investment strategy, while another firm will serve as custodian. Companies such as Fidelity Investments, Interactive Brokers, and Altruist act as custodians, responsible for safeguarding your financial assets.

Specifically, a custodian arranges settlements of purchases and sales, creates reports on those assets, and administers tax withholding documents. Your statements would come directly from the custodian.

Every investment Advisor makes claims about experience and education.

• Did he or she actually work at XYZ Company?
• For how long? Why did he or she leave?
• Does he or she have a series of designations following his name?

What about disciplinary issues? You can find out through the Securities and Exchange Commission, which keeps records about investment Advisor representations (including disciplinary actions) at its Investment Advisor Public Disclosure page.

If you are considering working with a broker, refer to FINRA’s Broker Check.