Investment Advisors
Do I need professional advice to invest successfully?
I think that the simple answer to whether you need professional advice to invest successfully is absolutely not. There is nothing about a professional advisor that is going to allow for superior performance above what you can do on your own. That said, I feel a good financial advisor can more than pay for themselves in what they can bring to the table in education, understanding, and discipline. So while I don't think it's necessary, I think there's a lot of benefit you can actually receive from working with a good professional investment advisor.
What are the various types of investment advisors?
There's many different types of investment advisors. In fact, there's no real rule against who can call themselves an investment advisor and who can't. So you might see a financial planner, a registered investment advisor, a stockbroker, a registered rep, or a wealth manager. There's all different types of terms that could be used for people who could potentially be an investment advisor.
What is a "stockbroker"?
A stockbroker is someone who is employed by a brokerage firm. That brokerage firm, as well as the stockbroker, are licensed by the FCC. However, they are managed and overseen by the NASD. A stockbroker, who could be an investment advisor, might call themselves a financial consultant, a registered rep., etc., but really their licensing allows them to receive commissions as well as fees. Stockbrokers are really limited on the products that they can sell: they are those that are provided by their brokerage firm.
What is an "investment advisor"?
The term investment advisors is very generic. It's not an actual term that defines a specific type of license or experience or even how someone is compensated. If someone says they're an investment advisor, you're going to want to ask more questions about compensation, how they're licensed and how they're regulated.
What is a "registered investment advisor"?
A "Registered Investment Advisor" is an individual or a firm that is licensed directly with the SEC. And what that license really allows the registered investment advisor to do is provide investment advice. It is not a license to trade. It's not a license to sell product. It is really where you are going to find your true feeling financial advisors. What's also interesting and unique with a Registered Investment Advisor is they have a true fiduciary responsibility to their client. Well, what does that mean? The registered investment advisor has a legal responsibility to put the needs of their client ahead of their own. So it's a very high level of care and responsibility that the registered investment advisor is going to have towards their clients.
What is a "discount broker"?
A discount broker is a generic term that really relates to a brokerage firm that is providing their services at a discount. In the traditional sense when we think about a discount broker what we really should be thinking about is these are brokers that you can go direct to as a consumer. And you're going to be able to place trades directly through them and not have to work through a stock broker. And, so, many times the discount broker, you might get different advise or not as much advise as when you are working with a, quote, full service brokerage firm. They're really there to help you execute trades in stocks and bonds.
How does my investment advisor get paid?
There's really two main ways in which a financial professional is going to be compensated. There is commissions, through the sale or implementation of a product, or there is a fee, and that fee could be an asset based fee, a percentage of investable assets, or just an annual retainer fee, or even an hourly fee. Within that realm there are many different shades of gray. There is a fee only. A true fee only means that the only way in which someone can be compensated is purely by a fee paid by the client. Fee based is someone who can do both. They might be taking their fees based on assets, or based on an hourly type arrangement, but they can also take commission fees. Then there might be someone who is 10% commisions, really those are for the sales and implementation of a product.
How can I analyze my advisor's performance?
When trying to determine if your working with a good investment advisor or evaluating your advisor's performance, think about why you are working with this investment advisor, and what the investment advisor's role is, and how the investment advisor is helping you. If we're talking about a traditional financial planner, or investment advisor, that person isn't really there to pick and choose stocks for you. Those should be experts, people running mutual funds, that's all they focus on. So an investment advisor is not necessarily putting in a historical performance. It's more a question of whether this investment manager listens to what I have to say. Does my investment manager understand me? Does my investment manager help make sound recommendations? Is my investment manager willing to spend the time to explain why they're making one recommendation over another, and ultimately also what is the investment manager's motivation. How is the investment manager being compensated for making recommendations, and does different compensation affect recommendation they might make what potential conflict of interest really exist with the investment manager.
How do I choose the investment advisor who is right for me?
To try to select an investment advisor that's right for you, then you want to start with "What are you trying to get out of that relationship?" Are you looking for someone who's just going to look at what you're doing right now and make some recommendations on how you might want to change things? Are you looking for a long-term relationship, someone to really help with your investments and your taxes and your estate planning? And so, depending really on what you need, I think it's going to lead you towards a different type of person that you may want to work with. You want to always think about compensation, and how is this person compensated, and are there conflicts of interest from their compensation. And depending on how you want to proceed, and what you're looking to have accomplished, it's going to kind of direct you to some of the different options relative to working with a financial professional.
Can I access the same research and data used by professional investors?
With the power of the internet today, most of the information that a professional is going to get access to is available to the individual investor. There are some exceptions to that, and those software programs are data aggregation programs which are extremely expensive. I think the place to start would depend on what information you're looking for. You can get a vast majority of that from the internet, most of the finance sites that you might find on the internet are going to let you get free quotes of individual stocks. They will sometimes refer you for a very small monthly fee, show you what all the analysts are rating the stock, so whether they think it's a buy, sell, or hold. You go into the financial data and they'll consolidate access to the company's website, let you get annual reports, chart its past performance. Therefore most of the financial websites are really going to provide you a large breath of information as it relates to individual stocks, bonds and mutual funds.
