Litman Gregory’s Guide to Hiring an Investment Advisor
We are often asked what to look for when hiring an investment advisor. We typically get this question when someone has come into wealth and is looking for sound investment advice. Others perhaps have been managing their own investments but are at a stage in life where it’s time to bring in a professional advisor and spend more time on other activities. In other cases, some are reaching retirement and want an advisor to assist them through this transitional period. Whatever the reason, we thought it might be helpful to share more broadly our thoughts on what to look for when searching for an investment advisor.
Finding the best investment advisor is partly about finding a qualified investment advisory firm or individual advisor, and partly about finding the advisor that is the right fit for you. We recommend using the following criteria to narrow down your search:
1. Fiduciary Responsibility: Is the advisor operating as a fiduciary? A registered investment advisor is a fiduciary, which means they have a legal responsibility to act in the best interests of an investor. Stockbrokers and brokerage firms are not fiduciaries and instead rely on a standard of “suitability.” This suitability standard states that a recommended investment only needs to be appropriate for the client, but it does not have to be what they believe is the best investment. We recommend hiring a firm that is an independent registered investment advisor.
2. Investment Experience: Who will be managing your investments and what are their qualifications? Look for investment professionals who have experience and credentials (like a CFA® or CFP® designation, or MBA). Does the firm have an investment process that drives investment decisions? We recommend finding a firm with a well-articulated investment process as well as experience through several market cycles. Did their process remain intact through the tech bubble of the late 1990’s and the recent financial crisis of 2008? Also, the investment philosophy of the firm should match with your own personal investment philosophy. For example, if you are an investor who is most concerned with protecting your assets on the downside, a firm that invests primarily for growth may not be a good match for you.
3. Compensation: How are they compensated? The answer should be straightforward, transparent, and without conflict of interest. Is the compensation fee-only or commission-based? Does the advisor earn a commission on selling you proprietary products? Look for a fee structure that aligns the advisor’s incentive to provide advice consistent with your goals. We recommend fee-only compensation structures over commission-based.
4. Ideal Client: Many advisors have a focus within their practice and work with a specific subset of clients: retirees, business owners, young families, multi-generational wealth, ultra-high-net-worth individuals, etc. Working with an advisor that has experience with client situations similar to yours can be beneficial. We recommend that you ask about the advisor’s clients and find an advisor whose ideal client sounds like you.
5. Communication and Reporting: How often will you be able to meet with your advisor? What reports will you receive or have access to through an online portal? We recommend finding an advisor who is willing to formally meet with you at least a few times a year and has the ability to be responsive to your needs. The advisor should be able to send you quarterly reports of your accounts which include investment performance at a minimum.
6. Who has custody of your assets? In a post-Madoff world, it is of utmost importance to understand what firm will actually take custody of your assets. We recommend looking for an advisory firm that uses a large, reputable third-party custodian (e.g. Charles Schwab or Fidelity) to ensure “checks and balances” for their clients. This third-party custodian should be able to verify your account balances and provide reports separate from the advisor. It is customary for the custodian to charge a separate fee for their services, which can be a percentage of assets based fee or commission-based.
Once you find a few firms that may be a good match for you, we suggest that you schedule time for an in-depth interview, either by phone or in person. Do you feel comfortable with the investment advisor? Do they demonstrate an interest in your financial goals, listen to your needs, and answer your questions? Who is your team? If you can, visit the office and get a sense of the culture of the firm, and meet different members of the research and client service teams. Trust is paramount to a successful relationship with your investment advisor – the more you trust them, the more you will share, which in turn will help your advisor to make better recommendations to you and help you through your life events. Take this opportunity to learn as much as you can about the firm and the people who will be managing your investments and helping you with important financial decisions.
Also, take this time to learn in greater detail about how the advisor will work with you. Ask the advisor to walk through a couple examples of how they have worked with clients similar to you. Sometimes the best way to learn about an advisor’s service level is to hear about it from their own clients – so ask for a few references.
Once you decide to work with an advisor, we recommend that you execute two important documents: an investment policy statement and an investment management agreement. An investment policy statement outlines the guidelines for managing the investment strategy for your portfolio. This policy may include asset allocation ranges that provide limits for how far the portfolio may deviate from the agreed strategic allocation. Your advisor would require your approval to invest outside of these ranges. The investment management agreement is a legal document that defines your relationship with your advisor, and their responsibility to you.
Finding an investment advisor can be time consuming, but it is well worth your time to find a qualified advisor who is the right fit for you. We hope this guide is helpful for your search and, as always, please let us know if you have any questions or comments.
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Litman Gregory Joins iM Global Partner
We would like to share some important and exciting news about our company’s future. After much due diligence and careful thought, the firm’s principals and founders have decided to take a significant step toward growing our resources and ensuring our ability to excel for generations to come by joining iM Global Partner, a privately held global investment services firm.