Choosing an investment advisor or money manager should be a careful process based on diligent research. The best relationships start with a shared investment philosophy, followed by a building of trust through education and transparency.
Several months ago, I wrote an article on 5 BIG Mistakes To Avoid When Choosing An Investment Advisor. This addressed some common misconceptions and suggested many important questions to ask before you begin any new relationship.
To expound on that theme, I want to detail some red flags that often come up in my conversations with clients that have tried various quasi-advisors in the past. Many of these people have taken a part-time interest in investments or may not even be who they say they are.
Uncovering that information should be of vital importance to your wealth.
The Online Trading Guru
There are a great deal of legitimate traders and investors on social media that run newsletters or other private services to help a select list of private clients. Over the years, I have befriended some genuine professionals that I would reasonably let manage my own money if I weren’t already in the business.
Then there are the guys with the pictures of Ferrari’s and models in their profile. They have handles like “billionairetrader92” or “darknightvixslayer”. They want you to believe they turned $1,500 into $15 million in the last two years.
Maybe they even have some illegitimate testimonials or penny stock advice they pan out to try and hook you in. I love when they include their first-place trophy in the 2012 stock picking contest you’ve never heard of too.
These aren’t advisors. At best, they are speculators. At worst, they are full blown criminals. Be wary of anyone who advertises unreasonable performance or is hiding behind a cloak of anonymity.
There is a reason why.
The Guy From Church
I don’t care what religion you currently practice, there is always “the guy that manages money” at church. The instant leap of logic is that you share common philosophies on ethics or life so you must be aligned similarly in your investment outlook as well. It’s easy to throw out the due diligence playbook because he must be on the up and up if he goes to the same church as you.
The sad part is, that logic doesn’t always translate to successful results in the real world. In fact, it’s a terrible way to pick your investment advisor.
You may feel an initial kinship with this person, but you have no real idea what they will put you in or what their fees are unless you ask. You may also have a much harder time parting with them if the relationship sours knowing that you must face them each week regardless.
My advice is to avoid the conflict whenever possible or treat them like you are hiring any other professional to manage your wealth. Put a strict emphasis on due diligence, boundaries, and expectations.
The Insurance Salesman
This is one of my favorites. The guy who sold you that whole life insurance policy is now doling out advice on which mutual funds to own. The unsound logic here is that you made an initial financial transaction with this person to protect your family, so why not extend the relationship to the rest of your net worth?
Maybe they want you to put all your retirement money in that “guaranteed” annuity. Maybe they want you to pick up a few mutual funds that their firm “recommends”. These suggestions are more than likely going to result in fees and commissions driven to the salesmen rather than driving long-term results for the client.
The reality is there will be little to zero service once the initial transaction is complete and they may even keep pestering you for more money or referrals. Be very wary about locking up your liquid investment portfolio into high-fee insurance products. Especially those with caps on gains and restrictive exit fees.
The Tax Accountant
Call from your CPA: I’ve got great news! You are getting a refund on your taxes this year and I highly suggest you place the money in an IRA for your retirement. Oh wait, you don’t have an investment advisor? Don’t worry about that. I can get you setup with some investments that will work great for you.
Accountants, like insurance salesmen, specialize in one thing. They should stick to that thing. Why let a part-time investment guy using an obscure broker-dealer put your money to work in funds that are likely just going to generate more fees for him?
They don’t have time to watch your portfolio. They don’t have the tools to research the investment landscape to ensure you are invested in funds with the lowest possible fees or best long-term results.
They just open Barron’s or talk to their broker for a few minutes and place you in a group of funds with questionable motivations. If those funds also generate some back-door revenue for them without you knowing…what could that hurt?
Well it could hurt your net returns.
The Little Bit Shady Investment Advisor
Ok, so you did some research and found a true registered investment advisor that has been in the business for a while. They make all the right promises and seem to know what’s happening in the market. That’s a good first step.
However, did you look up their record online?
Every advisor registered with the state or SEC has a historical record that you can view instantly for free. It will tell you if they have any previous issues with clients, have continually jumped firms, or even had a previous judgement rendered against them. All this information must be disclosed on their U-4 (which is the record the SEC uses to keep tabs on financial professionals).
You wouldn’t believe how many advisors are currently practicing who have had to settle regulatory or client disputes. There are also several that have had legal issues in the past as well.
Do you want an advisor that has had a DUI or misappropriated client funds? If you wouldn’t hire this person to watch your kids. Are you going to hire them to watch your money?
I would hope not. Do the research. Just google “FINRA broker check” and it will come right up.
The Bottom Line: Take Your Time to Decide
My advice when hiring an investment advisor (whether they are registered or not) is to take things slow. Don’t let them pressure you into anything that sounds funny or outside the norms that you have experienced in the past. The more investigation and trust that you can build beforehand will ultimately result in a better long-term experience for both of you.
If you truly take the time to study all aspects of a relationship or transaction, you will be much better informed of the benefits and risks that come with it. Furthermore, you can align yourself with someone who has your best interests at heart and is not just trying to line their pockets to the detriment of your savings.
Visit our free Special Reports section to read 8 Retirement Portfolio Red Flags and The Benefits of Working with a Fee-Only Advisor.