Curiously, when choosing a Financial Adviser, there is one big criterion to deemphasize and a dozen more important criteria to focus upon. A Four-Step Guide:
Step One: Deemphasize Performance.
- Selecting a Financial Adviser by their purported investment performance is like judging a book by its cover.
- Beware of Financial managers who quickly state their returns and try to close the deal. Its very easy for Advisors to favorably manipulate their returns.
- There is no one standard for multi-account investment managers to report investment returns, and as a result, there are a number of ways a manager may unfairly manipulate their performance.
Step Two: Initially its better to screen for factual and behavioral attributes such as the Advisor’s Fiduciary status, their disciplinary record, and their experience.
- Check to see whether they are licensed securities brokers, insurance brokers, bankers or Registered Investment Advisors
- Go to https://brokercheck.finra.org/check to check on the investment manager’s complaint and disciplinary record
- Review their ADV Part 2 if they are a Registered Investment Advisor, otherwise ask for their resume.
- The candidate’s Fiduciary status should be a primary consideration.
- Is the advisor an SEC sanctioned Fiduciary? Only Fiduciaries are required to exclusively act in your best interests and disclose any conflicts.
- Is the Advisor also NAPFA sanctioned Fee-Only Fiduciary? They will not accept commissions that may influence their advice to you.
Step Three: Qualitative Screens for Compatibility.
- You are entering a potentially long-term relationship. Make sure that you are compatible.
- Focus on the Advisor’s empathy and understanding of you and your objectives.
- Are you comfortable with the way your advisor communicates?
- Assess the cohesiveness and long-term viability of the firm.
- Does the firm operate as a one-man-band or a team of peers? Are at least two professionals working on your account?
- A relationship may last decades. Will your advisor be there in 20 years? Does the firm have an orderly perpetuation plan in place?
Step Four: Assess the Adviser’s claims of Investment Performance
- There are many ways for an adviser to calculate returns; Don’t blindly accept the adviser’s returns.
- Question their calculations including:
- The use of objective third-party calculating software
- Ask if the returns based on the adviser’s entire portfolios or were the returns quoted simply cherry picked from a specific client who had high returns?
- Are all fees included?
Good luck with your due-diligence! If you have questions please contact Thomas.Saunders@winthropPartners.com or call 267-454-4585.