Tips to Land an Advisor & Not Get Hooked

When you start investing, you should realize financial advisors and brokers come with different credentials, different fees—and different ethical standards. Before you trust one to handle your money, know who is working for you.

Do-it-yourself trading might appeal as a cheaper and easier way to invest, but it may not be in your best interests.

True, Internet trades generally have lower fees, and transactions can be as simple as a couple of clicks. BUT…beginning investors may bear more risk and may not get the best share price by going it alone.

A good broker just might be worth the price of the commission. Many brokerage firms do offer both trading by talking with a broker as well as placing a buy or sell order online, so a combination of both might be a good option. Full-service firms may also offer access to research about a company and other exclusive services.

Many investors seek out a financial advisor who fits them long term, and don’t just take the broker who answers the phone when they want help. Look for a broker and/or financial advisor who goes beyond mere investment recommendations and will:

  • Help you develop long-term investment goals and keep focused.
  • Brainstorm to educate, develop ideas and present an overall picture.
  • Determine your specific risk tolerance and help balance your potential risks and returns.
  • Monitor and adjust your investment plan, but not guarantee results.
  • Provide accurate information and not overload you with unnecessary data.
  • Help you narrow choices objectively, discuss pros and cons, suggest appropriate investments.
  • Focus on achieving your goals, not selling you products or services.
  • Provide research, price quotes, analysts’ opinions and recommendations.
  • Help with paperwork, updating, investment tracking and history of transactions.
  • Willingly disclose his/her commission or fees and your costs for each transaction.

They all get paid somehow

All investment advisors and broker-dealers get paid  – or they wouldn’t be in business. Those fees come in the form of sales commissions, administrative and management charges, markups/markdowns, and/or marketing fees. Fees matter – a lot. They eat away your profits and leave you with less to invest. Discuss fees and services you expect BEFORE investing – ethical, honest advisors aren’t offended.

Ask your advisor exactly how he/she gets paid. It could be a:

  • Management fee – percent of the value of assets managed for you. (Can be .5 to 2.0% annually.)
  • Per-hour fee – for time spent working on your investments. Rates vary widely.
  • Retainer fee – perhaps charged quarterly or annually.
  • Fixed fee – to create a retirement plan, for example.
  • Commission on products they sell. Examples are front-end sales load to buy a mutual fund, surrender charge to sell an annuity, commissions on a REIT (Real Estate Investment Trust).
  • Some combination of the above.

There are pros and cons to each fee structure, so decide what best suits you. It’s okay to ask about the value you can expect.

In addition to advisor’s fees, consider the three ‘Es’ for advisors – Ethics, Experience, Education.  In fact, you may have heard a lot of buzz around the “fiduciary rule” recently.

Fiduciary Rule?

Investors often assume advisors and brokers act in a clients’ best interests—it’s an ethical obligation, right? Not always.

According to the Financial Industry Regulatory Authority (FINRA), breach of fiduciary duty is the number one complaint in arbitration cases.

Two professions….two standards of ethics

The financial marketplace divides professionals into two groups that work with individual investors—investment advisors and broker-dealers. Each has a standard of professional ethics.

Investment advisors operate by the standard of “fiduciary” duty, and they must act in the best interests of their clients when providing investment advice. Brokers abide by a “suitability” standard when they sell products. That means clients can essentially be sold an investment as long as the broker matches the investment strategy to the client’s investment profile for risk, goals, needs age and experience.

The two standards of ethics—fiduciary duty vs. suitability—are not the same and most investors don’t realize the difference.

Changing to have one uniform fiduciary rule has sparked hot debate, and further confuses the issue. Many are dubious of a uniform standard, doubting it will offer consumers adequate protection.

The two sides of the investor protection coin…

On one hand are groups like AARP, Consumer Federation of America and financial planners. The latter have expressed caution with a blended rule, warning that this may lower current standards for investment advisors. The Investment Advisor Association have favored the stricture fiduciary standards, as has the North American Securities Administrators Association (NASAA), the voice of state securities regulators.

On the other hand, the broker community opposes a new standard they think could be detrimental to individual investors. The Securities Industry and Financial Markets Association (SIFMA) has supported a universal fiduciary duty rule. The National Association of Insurance and Financial Advisors has agreed to work toward a uniform rule, but is concerned that may increase costs, limit access to financial products/services, and not protect consumers.

Who decides?

The Dodd-Frank Act, in its effort to protect individual investors from financial pitfalls, puts the U.S. Securities and Exchange Commission (SEC) on the hot seat. The SEC has contended investors are confused by the different standards of care that apply to investment advisors and broker-dealers.

About those credentials…

Equally as important as ethics are the advisors’ credentials, or what type of education they have.

Financial pros want certifications and licenses to market themselves, especially to investors with nest eggs. A FINRA Foundation survey showed almost half of retired investors are more likely to take financial advice from someone having a professional designation.

But financial designations are literally an alphabet soup of acronyms, and consumers struggle to tell the difference. Here are a few:

  • CFP—Certified Financial Planner
  • CIC—Chartered Investment Counselor
  • AAMS—Accredited Asset Management Specialist
  • CAM—Chartered Asset Manager
  • CEP—Certified Estate Planner…

There are dozens more. FINRA monitors a database of about 150 of these certifications, about half of those being used in the financial industry.

While most financial professionals are competent, experts suggest that consumers can’t tell the difference between the rigor and education behind various credentials. Some designations, such as Certified Public Accountant or CPA,—require a college degree, test certification and continuing education. Others can be a weekend class. Unfortunately, many credentials sound similar, but aren’t.

If you want to know the educational background for an advisor before you give them your money to invest, just ask the advisor or check with your state securities regulator. (Investment firms managing more than $100 million in client assets must register with the SEC. Those managing less money register in the state where their principal office is located.)

You can quickly check out an advisor’s background and disciplinary action filed at FINRA at Or check through your state securities regulator at NASAA.

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