Economic events of the past few years have fostered a renewed awareness among investors of the need to carefully contemplate the ethics of their financial advisors. At the same time, many advisors and others in the financial services industry feel a heightened sense of responsibility to conduct their businesses with transparency.
“Many investors appreciate that establishing a personal relationship with a trusted advisor is essential to building a financial plan that meets their individual goals,” says Richard M. Burridge Jr., CEO and chief investment officer of RMB Capital Management, an investment advisory firm headquartered in Chicago. “But they may not understand how to evaluate the different types of advisors that exist – independent advisory firms, wirehouse brokerage firms, private banks, or retail banks with investment services. Obviously, trust is a primary consideration, so investors need to understand who they can rely upon to serve their best interests.”
Burridge says there are six main things investors should consider when trying to decipher an advisor’s motivations:
1. Industry standard – Knowing the standard of care that the advisor is required to uphold is a good place to start—those governed by the “fiduciary standard” of serving your best interests must abide by stricter guidelines than those who need only satisfy the “suitability standard.” By definition, the fiduciary standard mandates that advisors put their own interests below those of their clients, and it requires more thorough investment analysis and the “best execution” of trades (lowest possible price in the shortest time frame).
2. Client focus – Look for an advisor who is dedicated to understanding and addressing your unique circumstances with personalized financial planning strategies and investment solutions. Your advisor should also be primarily focused on serving her existing clients rather than finding new ones. Advisors whose main goal is to grow the number of clients on their roster will continue to dilute the time and attention they are able to devote to each individual client.
3. Transparency – Your advisor should be able to provide a clear explanation of how he is compensated. If your advisor can profit from specific investments or transactions you make, there may be conflicts of interest that could influence his recommendations. Beyond personal compensation, your advisor should also outline all other potential fees your investments may incur. Understanding the fees associated with each product or service helps you manage the costs of investing, and it can foster trust between you and your advisor.
4. Choice – An advisor who is only able to provide clients with access to her company’s proprietary investment vehicles generally has a limited scope of solutions to offer. Ask your advisor whether her firm has an open architecture that is nimble enough to take advantage of niche opportunities in the marketplace. A broader set of options can help to create an asset allocation that is optimized to meet your individual wealth preservation and growth goals.
5. Integration – Just as your personal health requires attention from a variety of caregivers, your financial wellbeing also depends upon the expertise of a range of professionals. Your primary financial advisor should have a holistic approach and a comprehensive view, working with your estate planning attorney, tax advisor, insurance agent, and your other financial advisors (if applicable) to ensure the various components of your plan are in harmony.
6. Values – Look for an advisor who is genuinely committed to helping people. If your advisor prioritizes “giving back” through community or charitable involvement, it can be an indicator that he is also driven to uphold his professional responsibilities to clients.
“Choosing a financial advisor is not a decision that should be taken lightly,” Burridge says. “Ultimately, you need to believe that this person will care not only for your livelihood, but also for that of your heirs. If you are asking the right questions, you should be able to sort through the alternatives confidently and establish a long-term relationship with an advisor that is deserving of your trust.”