How to Select a Financial Services Provider
Most people who are new to investing – and even many who aren't – could benefit from the advice of a competent financial services provider. But selecting one takes some time and effort.
You'll want to ask yourself and any potential advisers some important questions before you invest even a penny. You'll also want to know something about the titles and credentials advisers use to identify themselves. The organizers of the free, non-commercial Investor Education in Your Community workshop series offer some tips.
I know I could benefit from the advice of a competent financial services provider, but how do I go about selecting one? Their titles and credentials can be confusing – and do they mean anything? More importantly, how can I find out whether the advisor I'm considering has a disciplinary record against them, or even a criminal background?
Let's start by defining three types of financial services providers:
Investment Advisers:
Registered Investment Advisers, or RIAs, provide ongoing advice and are subject to a fiduciary standard and up-front disclosures. RIAs typically manage your portfolio on a discretionary basis and are compensated by an asset-based fee.
For example, a 1.5% asset-based fee for a $100,000 account would be $1,500 annually.
Investment Advisers are also referred to as known as investment manager, investment counsel, asset manager, wealth manager and portfolio manager.
Brokers:
Brokers are In the business of buying and selling securities for their customers and are not subject to a fiduciary duty. Brokers are instead held to a "know your customer" standard, meaning that the broker has a responsibility to know your investment objective, tolerance for risk, level of experience, etc., so that her or she can recommend appropriate or "suitable" investments.
Officially referred to as Registered Representatives, brokers are also referred to as stockbroker, financial consultant, financial adviser.
Brokers are typically compensated through commissions generated by the buying and selling of investments. However, when acting as a representative of their firm's RIA by providing fee-based investment management services, they are generally compensated by an asset-based fee.
Financial Planners:
"Financial Planner" is not a legal term. It is used to describe a financial services professional who generally develops and implements comprehensive financial plans for customers based upon long-term goals including estate, tax and insurance planning. Most financial planners also develop and implement investment strategies and can be compensated on either a commission-based or fee-based basis.
But before you select a financial services professional, you need to ask yourself a few questions
Questions to Ask Yourself
- Do I need assistance in developing an overall goal-oriented strategy?
- Am I just looking for a specific investment strategy?
- Am I looking for tax and estate planning?
- What level of involvement do I want in the decision-making process? And,
- How do I want to pay for services: a fee, commission, a percentage of assets?
Questions to Ask Your Provider
Once you've decided what services you're looking for, you'll need to ask your provider a few questions:
- What services do you offer?
- What qualifications do you have to provide those services?
- How do you charge for those services?
- Will you provide references?
- Do you have a record of disciplinary action against you?
Most financial services providers are professional and competent. And most will answer these questions for you as a matter of course during the interview process.
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