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The Investor's Checklist

What You Need to Know When Hiring an Investment Professional

Most individuals find that the uncertainty of retirement can be stressful. While many hire investment professionals to help them on their journey and give them the confidence that they are headed in the right direction, others manage their own retirement plan. In our report, we will examine an investor’s options, and if an investment professional is right for them, we will outline what they should know and what they should avoid before they hire anyone.

Executive Summary:

  • Do I need an investment professional?

  • Are there different types of investment professionals?

  • What questions should I ask?

  • How do I protect myself from fraud?


Do I Need an Investment Professional?

When deciding whether or not to hire an investment professional, one should consider:

  • Your level of financial sophistication and desire to manage your savings

  • The size and complexity of your portfolio

  • Your financial needs, wants, and goals

In the past few years, the investment industry went through a significant change. Advancements in technology, the proliferation of low-cost investment firms (Vanguard, Blackrock, Schwab, and ETrade) and products, such as Exchange Traded Funds “ETF’s”, leveled the playing field for the individual investor. Now, more than ever, investors have the resources available to create a financial plan, build a diversified and efficient investment portfolio and monitor their results in real-time.

The main advantage of the “DIY” (do-it-yourself) investor is the reduction of fees and costs over the lifetime of the plan, which can be significant. The typical investment advisor charges 1% of assets each year (e.g., 1% of a $100,000 portfolio yields a $1,000 management fee each year).

While “DIY” investing reduces portfolio costs, hiring an experienced investment professional, at a reasonable fee, should more than pay for itself through portfolio construction, tax efficiency, wealth management and sound guidance. In fact, Vanguard states in a recent whitepaper, that the potential benefit of an investment advisor utilizing best practices can add about 3.0% each year through retirement. In addition to the incremental return, you should receive peace of mind that you are headed in the right direction, and your retirement will be secure.

If you want to manage your own retirement plan, the companies listed above are an excellent place to start the process. In our view, Vanguard, which has a robust, low-cost platform and a significant amount of free resources to the best place get started.

If “DIY” is not for you, the next step is to understand the different types of investment professionals and the services they provide.


Are their Different Types of Investment Professionals?

Yes, many types of professionals offer investment advice – Investment Advisors, Brokers, Insurance Agents, Financial Planners, Accountants, and even Attorneys. While there are many options, in our view, it is best to know how the professional is paid and to understand if there are any potential conflicts of interest.

Essentially, investment professionals are compensated in three ways:

  • they receive a commission for the sale of a financial product

  • they receive a flat hourly fee for advice

  • they receive a flat management fee, which is typically a percentage of assets under management (e.g., 1% on a $100,000 portfolio equals a $1,000 management fee).

Paid by a Management Fee that is a Percentage of the Assets

  • Registered Investment Advisor (RIA) – is a legal term that refers to an individual or firm that is registered with the SEC (or the state securities regulator) and is paid to provide investment advice or manage a client’s investment portfolio. According to FINRA, common names for investment advisers include asset managers, investment counselors, investment managers, portfolio managers, and wealth managers.

  • Pros: a registered investment advisor is a fiduciary, who by law must put his client’s interest first and avoid any conflict of interest. Also, since the RIA’s fee is a percentage of the assets managed, your interests are aligned (i.e., if the portfolio grows by 10%, the RIA’s fee will increase by 10%, but if the portfolio declines by 10%, the RIA earns 10% less).

  • Cons: management fees can add up and reduce your portfolio long-term. Many RIA’s invest your money with external advisors (through mutual funds or wrap accounts), which leads to additional costs. In fact, many mutual funds charge more than the 1%, which the typical RIA charges. When interviewing managers, it is important to understand the total amount of fees and expenses you will pay each year.

Paid by Commission on Products Sold

  • Brokers (or registered representatives) – is an individual or firm that buys or sells securities for their clients and receives a commission as compensation. According to FINRA, registered representatives are primarily securities salespeople and may also go by such generic titles as financial consultant, financial advisor, or investment consultant. The products they can sell you depend on the licenses they hold. For example, a representative who has passed the Series 6 exam can sell only mutual funds, variable annuities, and similar products, while the holder of a Series 7 license can sell a broader array of securities. When a registered representative suggests that you buy or sell a particular security, he or she must have reason to believe that the recommendation is suitable for you based on a host of factors, including your income, portfolio, and overall financial situation, your tolerance for risk, and your stated investment objectives.

  • Pros: Brokers who adhere to industry best practices and disclose all forms of compensation, can offer solid investment advice for a low fee. Brokers may be a good fit for new investors with small portfolios.

  • Cons: While brokers must believe that their recommendations are “suitable”, they are not fiduciaries, they do not have to put client’s interests first or avoid conflicts of interest. In fact, some financial products that they recommend may provide additional compensation to the broker. Also, since brokers are compensated by the amount of product they sell, some are incentivized to recommend products that a client may not truly need.

  • Insurance Agents – is a salesperson who can help individuals obtain life, health or property insurance policies and other insurance products including annuities. If an insurance agent offers products that are considered securities—such as variable annuity contracts or variable life insurance policies—the agent must also be licensed as a registered representative and comply with FINRA rules.

  • Pros: Similar to brokers, insurance agents who adhere to industry best practices and disclose all forms of compensation, can offer solid investment advice for a low fee.

  • Cons: Insurance agents are salespeople who may have conflicts of interest similar to brokers. Additionally, annuities are very complex financial instruments that typically have very high fees.

Paid by Flat Fee or Hourly Rate for Advice Given:

  • Financial Planner – According to FINRA, financial planners can come from a variety of backgrounds and offer a variety of services. They could be brokers or investment advisers, insurance agents or practicing accountants—or they have no financial credentials at all. Some will examine your entire financial picture and help you develop a detailed plan for achieving your financial goals. Others, however, will recommend only the products they sell, which may give you a limited range of choices.

  • Pros: Financial planners can offer a solid financial plan for a low flat fee, which you can implement through a low-cost discount broker.

  • Cons: Financial planners are not regulated, so they can offer advice without a license or certification of their financial knowledge. Also, if a financial planner is selling products, they financial plan may exclude products that they do not sell – i.e., if they are only licensed to sell insurance products they may not include stocks in your financial plan.

Additionally, it is essential to verify that a professional is registered (as required by law) with an oversight organization and has a clean record. FINRA (the Financial Industry Regulatory Agency) has a database called BrokerCheck, which is a free tool to research the background and experience of brokers, investment advisors, and investment firms. Reports are available on every registered professional, which document their credentials, experience, and any regulatory action or complaints.

Once you determine which type of investment professional you want to work with, the next step is to interview a group of candidates by asking detailed questions.


What Questions Should I Ask?

Background Questions:

  • Tell me why you entered the investment business?

  • Tell me about your investment experience?

  • What professional licenses do you currently hold?

  • Are you registered with FINRA, the SEC or a state securities regulator?

  • What credentials do you have, and why are they important to me?

  • Are you a fiduciary and do you have to act in my best interest?

  • Have you had any disciplinary actions, arbitration awards or customer complaints?

Customer Service:

  • What experience do you have working with investors that are similar to me?

  • Do you have an account size minimum?

  • How do you communicate with your clients?

  • How often do you communicate with your clients?

  • Will I be actively involved in my investment strategy?

  • What products or services do you offer?

  • How are you compensated?

  • What other fees or expenses do you charge?

  • How do you avoid potential conflicts of interest?


  • What is your investment philosophy?

  • How do you manage investment risk?

  • How often do you make changes to my portfolio?

Finally, as you compare and contrast the various investment professionals, their credentials and their answers to your questions, it is important to identify the professional that you will adhere to industry best practices, and be someone that you will enjoy working with on your financial journey. They should explain their recommendations is simple, clear language that is easily understood. If you do not understand something, remember that you are the boss and ask them for more information.


How do I protect myself from fraud?

  • Use FINRA’s BrokerCheck to ensure that your investment professional and the investment firm they work for is registered and in good standing with no regulatory action or complaints against them.

  • Ask who is your custodian (the institution that holds your money). When possible, it is preferable to have the money manager and the custodian separate. Monthly you should verify that the portfolio statement from the advisor matches the report from the custodian. In the infamous Madoff Ponzi-scheme fraud, Madoff was the custodian, the investment advisor and he owned the auditing firm, so there was no way to verify that the numbers were correct.

  • Beware of getting rich quick schemes and offers that seem too good to be true. On average, history shows that the stock market returns approximately 10% per year, while bonds return nearly 6%. Since most professional mutual fund managers do not outperform the “market,” you should avoid advisors that promise gains that are significantly more than the market’s historical performance.

In summary, when planning for retirement, it is important to have a solid, low-cost plan that you are comfortable with and you will stick with in all economic environments. Also, understand how your investment professional is compensated and beware of any potential conflicts of interest. Finally, your investment professional should explain in simple terms what they are recommending and why it makes sense for your long-term financial plan. If you are uncomfortable or don’t understand, always ask for more information – remember you are the boss and your investment professional works for you.


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