Seeking an investment advisor isn't easy. Advisors vary widely in their training, backgrounds, experience and approach. And they have different levels of competency. The reality is that many advisors routinely fail to add value to your holdings in amounts that exceed their fees.
But having the right advisor can produce returns far superior to what you'd earn when left to your own devices. The key is to avoid choosing the wrong advisor. Clients of Bernard Madoff, whose Ponzi-scheme of an investment firm bilked them out of billions, are ruefully aware that choosing wrong can be hazardous to their wealth.
So how can you choose the right person? There are myriad ways to go about this, and none of them is a glass slipper for finding a princely advisor. But there are some rules of the road to keep in mind:
It's not what they're called, but what they do. You'll encounter various labels: financial planners, wealth managers, portfolio managers, financial analysts. These labels are generic, and don't tell you much about a person's background, training or approach to investing. So no matter what it says on the shingle, you need to find out precisely how they propose to make money for you.
Look past the alphabet soup. In their bios, advisors often list abbreviations for various titles after their names. Academic degrees aside, these impressive-looking abbreviations are known as "designations." They indicate that the holder has completed a course of study in a financial specialty.
Some of these courses are extensive and the examinations, demanding – for example, the requirements to be a Certified Financial Planner. But many designations mean only that the holder has passed an easy test after a course lasting a couple of days. Most designations are little more than sales tools.
Check up on them. If advisors earn commissions selling securities (stocks or bonds), they should be be registered with the Financial Industry Regulatory Authority (FINRA). On its website, FINRA has a search function consumers can use to check up on an advisor's background, training, education, disciplinary history and income sources.
If advisors earn fees from clients, they must register with the Securities and Exchange Commission (SEC) or with the comparable agency in the state where they practice. Investors can check up on these registered investment advisors using the advisor-search function on the SEC website. Both sites carry a history of complaints against advisors. Just because there has been a complaint doesn't mean you should forget about a candidate. But multiple complaints – or one that's particularly troubling – might be a red flag.
What's an advisor's "minimum"? Advisors usually require a minimum amount of assets that they will handle for a client. Often, it may be more than $500,000, but many advisors take $250,000 or less, especially from younger clients whose wealth is likely to grow as they age. You can save time by simply calling the advisor's office and asking what the minimum is.
Conduct an interview. You're the employer, so act the part. Ask advisors about their backgrounds, philosophies of investing, approach to risk and above all, how they get paid. If their answers make it seem as if they're not getting paid, be wary.