How to research ahead of time and make the most of your financial adviser

Choosing a financial adviser is a serious endeavor. You need to thoroughly research the firm’s history and qualifications as well as those of the individual adviser. Anything less than a deep dive into their track record endangers your future financial stability. Let’s look at some important ways in which to vet an investment professional.

Know the Type of Adviser You Need –

Brokers: If you are going to choose and track your own investments, you can save money by working with a broker. For many, it is overwhelming to choose their own investments. Also, most people are not equipped nor have the skills to choose their own investments like seasoned pros. Some brokers make their money by receiving a commission by selling you certain stocks, while others charge a flat rate and are not tied to certain options.

Fee-Based Companies: For most investors, fee-based companies are a better bet because they will help you choose investments that are the best fit for your situation and the current market conditions. They do not earn any commissions by selling you certain stocks. Thus, they will make choices in your best interest. Fee-based companies will either charge you an hourly fee, a percentage of your portfolio each year, or a flat fee.

Interview the Adviser –

If you are choosing an investment adviser firm from another state, you can still interview the individual adviser. The suggestion would be to use video telephony, like Skype. It is good to see facial expressions and why there are pauses in the conversation.

You will need to find out how the company makes money, how they choose securities, what they do to maintain your money when the economy trends downward, and get a general feel if there is congruity between what it states in the prospectus and what the adviser says. You also want to determine if the adviser can explain to you in layman’s terms the plan they have for your portfolio. You need to walk away from the interview with a written plan for your investments.

If anything does not appear above board, trust your gut and find another firm. This would include discrepancies, a lack of ability to communicate or an adviser that does not seem to fully know the policies of his or her own company. You are looking for transparency and lucidity.

Keeping Clear of Fraudulent Actors –

In your interview, you also can weed out the warning signs of fraudulent investment advisers.

Custodian Account: One big red flag at this point is if the adviser is calling for your nest egg to be in their control. That is not the industry standard. It is standard practice that a larger investment firm will be the custodian of your assets, while your chosen adviser will actually make the trades. The custodian firm will report directly to you about transfers of assets and such matters.

Commingling: Investopedia states that another red flag of a fraudulent adviser is when they place their name alongside yours on your investment account’s title. What this means legally is that they are granting themselves the ability to use your nest egg in whatever way they desire. This is a violation of the Security and Exchange Commission’s Code and Practice Standards.

Embezzlement: Some fraudulent advisers will try to embezzle your funds by convincing you that they need to have a power of attorney over your funds. If you allow this, they can then move your money anywhere they want, even into their own bank account.

Ponzi Schemes: This is when the funds of one investor are used to pay the returns into another investor’s account over and over until the whole scheme crashes on its head. According to Investopedia, most bad actors that try to pull off Ponzi schemes are not registered by the SEC, so the next step in the vetting process is crucial.

Checking Government and Credentialing Websites –

Consumer Reports states the obvious. When an adviser is found to have committed an offense against an investor, there is a 73 per cent chance they will end up with another firm and a chance they will again commit another offense against their clients. This is one of the reasons to thoroughly check investment advisers and their firms on SEC, state and private databases.

According to the SEC, other information that you will be able to glean on these securities databases includes information on investment adviser firm business operations practices, fee schedule, conflicts of interest and disciplinary actions taken against them. One of the databases contains the prospectus from each registered firm and earnings statistics.

Information on individual advisers includes their educational and employment history as well as any disciplinary actions on their records. There will also be information about the credentialing of the adviser.

Some of the most important databases to search in order to vet a prospective investment adviser firm and adviser professional include:
Investment Adviser Public Disclosure database
Professional Designations database
Individual State Security Regulators databases
Electronic Data Gathering Analysis and Retrieval

Independent Reviews –

You can check out independent reviews of financial advisers on sites like SmartAsset. SmartAsset provides comprehensive information on major advisers that includes the company’s history, investing philosophy, the types of clients and investment minimums they will accept, an accounting of their fee structure, awards they have received, the types of services they offer and any negatives about investing with the firm reviewed.

If you want to invest safely, it takes some time at the outset to do your due diligence and thoroughly investigate any financial advisement firm that you wish to work with. This will involve research that includes an interview of your prospective adviser, looking up information on government websites about the investment firm and looking into reviews on private, unbiased websites.

Photo: Gerd Altmann, Pixabay