How To Intelligently Choose A Financial Advisor

7/28/2019 How To Intelligently Choose A Financial Advisor

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1. Fiduciary Responsibility: First and foremost, a financialadvisor should be required to always act in your best interests,no matter what. This sounds as if it should be self-evident, but ina world where there are a multitude of different investmentproducts and strategies, very few of which are completely

transparent, financial advisors are constantly presented with theopportunity to choose what is most profitable for them instead ofwhat is best for their clients. Ultimately, whether or not anadvisor will put their clients first before themselves is a matter of personal integrity.However, you should seek out an advisor who is held to a fiduciary standard of carewith respect to the advisors financial interactions with you. In the investment world,Registered Investment Advisors (RIAs) are held to a fiduciary standard asmandated by the Investment Advisors Act of 1940, whereas stockbrokers and largeinvestment banks are held to a suitability standard. The key difference is, afiduciary must always act in the best interests of the client, whereas a broker subjectto a suitability standard is only required to make sure the investment is reasonable

based upon the clients time horizon and risk profile. As you can imagine, there aremany cases where an investment is suitable for a client, but not necessarily in theirbest interests, particularly where fees are concerned. This can be mitigated byseeking out an advisor that is a true fiduciary, which means an RIA.

2. Comprehensive Approach: Many financial advisors are, in reality, stockbrokers.Whats the difference? A stockbroker will help you choose investments that they feelare appropriate for your portfolio. A true financial advisor will help you with allaspects of your financial life, with your investment portfolio being a constituentcomponent. There is a vast difference between the two. A stockbrokersinvolvement in your finances terminates with investment management and isfocused solely on your portfolio. Unfortunately, this type of advisor often makesinvestment decisions in a vacuum of relevant information about your life that couldhave direct impact on how that portfolio should be managed. Instead, look for anadvisory team that takes a more comprehensive approach to advising. Your teamshould have a solid fundamental understanding of investing across multipledisciplines and asset classes, as well as expertise in estate planning andintergenerational wealth transfer, charitable giving, taxation, and how all of theseinteract with one another in the context of your personal situation.


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6. Flat Fees: There are essentially three different ways thatadvisors can be compensated for their services. First, they cancharge commissions on trades that they execute in furtheranceof their management of your portfolio (the traditional method ofcompensation). Second, they can share in the fees that a third

party investment manager charges the client for investing in itsfund (such as mutual fund loads or placement fees). Finally,they can charge a flat management fee in lieu of commissions orthird party revenue sharing. Focus your search on advisors whose sole source ofcompensation is a flat annual management fee that is clearly delineated from thecustodial and third party manager fees on your billing statement. A flat feearrangement is generally the most beneficial for the client because it means youradvisory team is compensated at the same rate no matter what investment theyrecommend you adopt. This eliminates any temptation or incentive for the advisor toplace you in investments that pay them more, or trade excessively in your account togenerate commissions. The result is an advisory team whose compensation is more

closely aligned with your individual goals and investment performance.

7. Experience and Credentials: At the end of the day, you want an experiencedfinancial advisory team. The reality is, it takes years of professional training and realworld experience with the capital markets before an advisor is able to adequatelydeal with the multitude of complex issues facing a client. This is particularly true ifyou heed my earlier advice and seek out a team that takes a comprehensiveapproach to wealth management. Professional designations, such as a CFP, CIMA,or CFA are valuable and generally represent a higher level of competence, but notalways. More importantly, look for a team that has been advising long enough tohave been through multiple market cycles with their clients and therefore betterunderstands how to advise in a variety of complex situations and environments.However, avoid advisors who appear so set in their ways that they are unable toadapt their management strategies to an ever-changing and increasinglycomplicated economic environment. It will take creative thinking and open-mindedcritical analysis in order to prosper in the new normal. Make sure your financialadvisory team is up to the task.

8. Professional Network: Sophisticated comprehensive financial advisory teams dealwith other financial professionals on a daily basis. As a result, they have anextensive professional network and can provide direct referrals to trusted sources forsome of the most critical financial decisions you face. This can include everythingfrom referrals to estate planning attorneys and CPAs, to insurance and riskmanagement professionals, and even mortgage consultants. Equally valuable, acomprehensive wealth management team will typically know if you're paying toomuch for something or not getting a competitive rate, and can advise youaccordingly. Ideally, an advisory team will not only help you manage yourinvestments, but will also help you reach your goals and make other major financialdecisions throughout your lifetime though introductions to other quality professionalswithin their network and helping to coordinate the efforts of that extended team.


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9. Specialization: Finally, look for a financial advisory team thathas specific experience and clients that are similar and relevantto your particular situation. If youre an entrepreneur or acorporate executive, look for a team that specializes in dealingwith the financial issues that face those individuals. There are

often issues and complexities associated with a particular type ofclient that an experienced team will know how to addressbecause of the multitude of similar clients with which theyalready work. Equally important as specialization, is the number of clients that anadvisory team represents. On average, a single advisor in one of the largewirehouses represents approximately 500 clients. Think about how much attentionyou will command as one of 500 clients. Unless you have a substantial portfolio, itsunlikely you will enjoy much if any personal attention in that situation. Instead, lookfor an advisory team that purposefully controls the number of clients they representand has a clear understanding of the maximum number of families they canrepresent without sacrificing service.

About the Author

Mr. Porter is the Founder and CEO of Three Bell Capital, a boutique privatewealth management firm with offices in both Los Altos and San Francisco, California.

Three Bell Capital focuses on working with entrepreneurs who are growing theircompanies, and are about to, or have recently experienced, a life-changing exit. Forthese clients, Three Bell Capital will help them develop a plan for their wealth thatincludes asset management, estate planning, tax strategy, insurance coverage, andlending.

Where applicable, Three Bell will also assist companies establish, transition, oroptimize their corporate retirement plans, and in targeted instances create liquidity forfounders and key employees in advance of IPO and acquisition by facilitating individualprivate placement transactions with institutional buyers.

Mr. Porter holds a Juris Doctorate, Magna Cum Laude, from the Santa ClaraUniversity School of Law, a B.A. in Political Science and English from the University ofWashington, is a member of the State Bar of California, and holds Series 7, 66, and CAinsurance licenses.


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How To Intelligently Choose A Financial Advisor