One of the best ways to build your wealth over time is to invest. However, there are times when investing is about more than just trying to choose an online broker, or a specific index fund. Sometimes you feel like you might need professional guidance as you try to save up for specific goals.
An investment adviser can help you choose appropriate assets to help you reach your goals, as well create a plan to keep your finances on track. Kevin Cimring, with portfolio management site Jemstep, recently offered me some helpful tips on how to select the right investment adviser for you.
Are You Dealing with a Registered Investment Advisor (RIA)?
One of the first things to look at is whether or not your adviser is “officially” a RIA. “This can either be a registration with the SEC for advisers with over $100 million in assets under management, or a registration at the state level for advisers with less than $100 million in assets under management,” Cimring says.
It’s important to understand the RIA distinction, since one of these advisers are required to perform a fiduciary duty to clients, meaning that the client’s best interests have to come first. “Advisers who aren’t registered, such as brokers, are held to a lesser standard,” Cimring says.
Cimring recommends that you review the regulatory documents related to your RIA, paying special attention to an item known as the ADV II. “Ask your advisor for a copy,” Cimring suggests. “If he is reputable and has nothing to hide, there should be no issues.” You should also check the FINRA web site for information on the adviser you are considering.
How Does the Adviser Get Paid?
This is one of the most important aspects of your background checking efforts. You need to know how your adviser will be paid. “A recent Harris poll commissioned by Jemstep highlighted that 76% of U.S. adults are not at all, or only somewhat knowledgeable, about the various ways that financial advisers are compensated,” Cimring says. “But it’s critical for you to know this since it could impact your adviser’s decisions about your portfolio.”
Cimring points out that brokers who earn most of their money from commissions may not act in your best interest; instead, they are more concerned with boost their own bottom line by putting you in products that might be ok — but won’t be the best.
“Investment advisers typically charge a flat or asset-based rate which helps to align with interests,” Cimring says.
How Does the Adviser Approach Investing?
It helps to have a solid idea of how the adviser approaches investment decisions. “If you are using an adviser to help with a long term goal such as wealth building or retirement, then there are certain things you don’t want to hear,” Cimring warns. “[Things] like stock picking, market timing, tactical allocation, and pouring everything you own into Apple stock.” He points out that you need to be “comfortable gambling with your retirement savings” to go that route.
Instead, he recommends looking for an adviser that promises to get to know your situation and risk tolerance, as well as his commitment to periodically rebalancing your portfolio. While you’re at it, Cimring says, it’s a good idea to find out about the custody situation with your assets. “Understand where your money is being held, and whether there are checks and balances in place to help keep your assets secure.” He recommends finding out if an independent third-part custodian or clearing firm is used if you go with a smaller firm.
With a little research, and some shopping around, it’s possible to find the right investment adviser for you.