Dol­lars & Sense

Con­sider these ques­tions when choos­ing an in­vest­ment ad­vi­sor

RSWLiving - - Departments - BY JAMES H. AP­PLE­GATE

Glad You Asked

There comes a time in life when a lit­tle help comes in quite handy. This can very well be the case when it comes to in­vest­ing, par­tic­u­larly as your in­vest­ment port­fo­lio in­creases and you near re­tire­ment. The good news is that there is a mul­ti­tude of in­vest­ment pro­fes­sion­als very will­ing to of­fer you that help. The bad news is that not ev­ery ad­viser is a good fit. With that in mind, we present ques­tions you should ask of any ad­viser who so­lic­its your con­fi­dence and the man­age­ment of your fi­nan­cial as­sets:

What is the ad­viser’s ex­pe­ri­ence, and how will your as­sets be man­aged?

Don’t just ac­cept the ad­viser’s word. Ver­ify. In­for­ma­tion on a Reg­is­tered In­vest­ment Ad­viser can be found at ad­vis­er­info.sec .gov. In­for­ma­tion on bro­ker­age firms and in­di­vid­ual brokers can be found at finra .org/bro­kercheck. Take your time and read these dis­clo­sures. If the in­di­vid­ual is not reg­is­tered, it is a red flag.

If the in­vest­ment pro­fes­sional uses a par­tic­u­lar in­vest­ment ap­proach, find out how long it has been in use and what the re­sults have been. Don’t ac­cept back-tested re­sults or vague state­ments as proof of per­for­mance. If you don’t suf­fi­ciently un­der­stand the in­vest­ment ap­proach, con­sider it another red flag. Re­mem­ber, re­sults that sound too good to be true usu­ally are.

How will your as­sets be held?

Ide­ally, your as­sets should be in­vested in a sep­a­rate ac­count in your name at a na­tional cus­to­dian or bro­ker­age firm. You should be able to in­de­pen­dently ver­ify the sta­tus of your ac­count, ei­ther through on­line ac­cess or third-party state­ments. Your ad­viser should have no abil­ity to with­draw funds from the ac­count other than preau­tho­rized pay­ment of pe­ri­odic fees. De­posits should never be made out to an in­di­vid­ual.

How is the ad­viser com­pen­sated?

Does that com­pen­sa­tion present a pos­si­ble con­flict of in­ter­est? Is the in­di­vid­ual paid to so­licit your in­vest­ment in a spe­cific money man­ager or in­vest­ment ve­hi­cle? Is the ad­vice un­bi­ased and in your best in­ter­est?

Has the ad­viser asked the right ques­tions?

Your ad­viser should un­der­stand what you want to ac­com­plish and how a rec­om­mended in­vest­ment fits with your fi­nan­cial sit­u­a­tion. You don’t want an ad­viser who is sell­ing a so­lu­tion with­out find­ing out what you need.

Is the rec­om­mended in­vest­ment ap­pro­pri­ate for you?

You know best what you need in terms of cap­i­tal preser­va­tion, how much and when you will need in­come from your in­vest­ments, liq­uid­ity, abil­ity to pass on to heirs, and the like. If the fi­nan­cial ad­viser is not ask­ing you about those re­quire­ments, you must ask how your needs will be met. Make cer­tain you un­der­stand the an­swers and prefer­ably have them in writ­ing. Ver­bal prom­ises and as­sur­ances are not en­force­able in court.

If the in­vest­ment does not work out as an­tic­i­pated, what is the fi­nan­cial ad­viser’s exit plan?

Will he or she strive to pro­tect your in­vest­ment, or are you on your own once you in­vest?

How much will it cost to im­ple­ment the new ad­viser’s so­lu­tion?

If you are re­quired to liq­ui­date as­sets, what costs will be in­curred to con­vert those as­sets to cash? This is par­tic­u­larly im­por­tant when liq­ui­dat­ing in­sur­ance prod­ucts such as an­nu­ities. Has the new ad­viser given any con­sid­er­a­tion to the tax con­se­quences of repo­si­tion­ing the port­fo­lio? What will it cost to pur­chase rec­om­mended in­vest­ments? Will those in­vest­ments be liq­uid, or will you have to com­mit to a hold­ing pe­riod?

And then, ask your­self why you are con­sid­er­ing the ad­viser.

If you are dis­sat­is­fied with your cur­rent ad­viser, you may want to talk about the is­sue with your ad­viser be­fore you make any changes. Re­mem­ber, chang­ing an ad­viser is go­ing to in­cur costs to move your as­sets and rein­vest. If your an­swer is be­cause you like the new in­di­vid­ual, you want to help them out, or you feel pres­sured to make the change by the in­di­vid­ual or another ad­viser, step back and give your­self time to re­con­sider your de­ci­sion. Work­ing with a fi­nan­cial ad­viser only makes sense if your in­ter­ests will be best served by the re­la­tion­ship. James H. Ap­ple­gate is a Cer­ti­fied Fi­nan­cial Plan­ner™ and re­gional di­rec­tor with Fi­nan­cial Ser­vices Ad­vi­sory, Inc., a fee-only in­vest­ment ad­vi­sory firm with of­fices in Fort My­ers, Florida, and Rockville, Maryland. He can be reached at 239-489-3346 or via e-mail at jap­ple­[email protected]­vest.com.

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