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Navigating the Advisory Jungle
Elizabeth Harris
01/01/2006
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Effort Rewarded
The first step is to evaluate what skills you really
need—a client with aging parents might seek a firm with expertise in elder care
issues, for example. Determine what problems you will face both now and in the
future. A senior executive nearing retirement, for instance, should avoid an
advisor who has little experience with concentrated stock positions. Do not be
your advisor’s tutor, or, worse, guinea pig.
Understanding your needs and
knowing what you want from an advisor is crucial to assembling a list of
prospects, whether that list comes from tips from friends or colleagues, Worth’s
Top 100 Wealth Advisors list (published in our October issue) or discussions
with like-minded individuals through groups such as the Institute for Private
Investors (IPI). (For more ideas, see “Remunerative Resources.”) It
will also help to ensure that you are not inadvertently swayed by the
increasingly aggressive marketing pitches many advisory firms make. Terrance
Odean, professor of finance at the University of California, Berkeley’s Haas
School of Business, studies investor behavior and cautions clients against
falling for pitches promising market-beating investment performance. “The
biggest mistake that investors make is chasing performance, whether they’re
chasing the hot stock, hot mutual fund or ostensibly hot advisor,” he
says.
Clients should treat advisors who court them aggressively with a
healthy dose of skepticism. When advisors present what amounts to a slick sales
pitch, consider it a red flag, says Charlotte Beyer, founder and CEO of New
York–based IPI, which provides advice and networking opportunities to affluent
individuals. “They are generally better at selling than strategizing,” she
says.
A thorough background check of both the individual advisor and the firm
is crucial. Those with credible professional credentials, such as a CPA, have
already been screened by a professional organization “Credible
Credentials”. This may provide some comfort. “It’s the same with other
professionals: Would you go to a tax preparer as opposed to a CPA?” asks Lauren
Prince, a certified financial planner with Prince Financial Advisory in New
York. However, it is best not to rely wholly on these credentials; even those
that reflect rigorous standards cannot take the place of in-depth research.
There are a host of free, often Web-based research tools offered by regulators
and professional organizations that allow individuals to check on an advisor’s
background “Remunerative Resources”. “A lot of problems could be
avoided if everyone did their homework,” says Mary Schapiro, NASD vice chairman
and president.
Finally, for your face-to-face interviews, assemble your
research and ask probing questions to determine whether or not an advisor meets
your individual needs. Compensation schemes should be carefully weighed. Ensure
you understand how fee-only, fee-and-commission and performance-based
compensation schemes work, and what the advantages of each are. (For a primer,
see “The Costs of Counsel,” November 2005.)
Find out whether you
will be working with an individual or with a team, and whether the firm has all
the professional expertise you will need in-house. How often can you expect to
hear from your advisor? Request a list of clients with whom you can speak. You
may be better off with an advisor who deals primarily with accounts of your
size, so ask for his average client’s net worth. Asking how the advisor suggests
you grade his or her performance is also revealing, says Jack Brod, principal
with Vanguard Asset Management Services, based in Valley Forge, Pa. “People know
their cholesterol levels really well, but if you asked them for their three-year
return on their portfolio, few of them could provide that,” he contends. “How do
I really know how I’m doing? If you can’t get straight, clear explanations, that
might be a signal.”
It is equally critical to establish a rapport. Clients
must bare their financial souls to their advisors. “Look for someone you think
you’re going to enjoy working with,” Dardaman counsels. A little due diligence
today may avert a disaster in the future.
Elizabeth Harris is a staff writer for Worth.
Illustrations by Jonathan Barkat.Additional Information
 Remunerative Resources
Emerging from the Thicket
Credible Credentials
A Designation by Any Other Name
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