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How To Pick An Investment Advisor

It’s a question financial experts get all the time: how should I chose an investment advisor?

The number of people offering some form of financial advice is quickly growing.  Smart Money reports, “the ranks financial planners, college aid advisers, mortgage brokers and more are expected to increase by 30% by 2018, to 271,200″ per the Bureau of Labor Statistics.

Obviously some of those 271,000 people will be better than others.  How do you find the advisor that is right for you?

It seems like a simple question, but  a checklist isn’t the only thing to consider, though it’s a good starting point.   Unscientific as it may sound, choosing an investment advisor requires a a little faith. You can investigate his or her background and look for certain good signs, but you also must be comfortable when you look them in the eye.

In a post-Madoff world a good relationship will be based on a lot of trust.

Trust: the most important part of choosing an investment advisor

Legally, an investment advisor is meant to be someone you can trust. Like your lawyer, they have a fiduciary responsibility to put your interests first. This is not the case with brokers (a.ka. stock brokers) who make money selling stuff and actually legally have an obligation to their employer. Generally selling more stuff is the most beneficial move for a brokerage firm, though not always the best for the client.

There are some red flags anyone should watch out for.  The most common psychological tactics con artists employ against their victims:

  • Promises of Wealth – The salesperson dangles the promise of wealth in a short period of time, often “guaranteed” with “little or no risk” involved. Remember: All investments carry risk.
  • Trappings of Success – The salesperson projects the image of success or offers testimonials, “proving” he and the offer are “legitimate.” Remember: Credibility can be faked.
  • The “Lemming” Effect – The salesperson tells you that others are investing and that you should too or risk losing out on a good deal. Remember: If everyone jumped off a cliff, would you?
  • Favors – The salesperson gives you something (like a free meal or a discount) hoping you will feel obligated to give him something in return (like your money). Remember: You have no obligation to return any business- related favor.
  • Act Now – The salesperson pressures you to “act fast” because the offer will only be available “for a limited time.” Remember: Do not feel pressured to make a quick investment decision.”

Questions to ask any prospective financial advisor

Here are the questions endorsed by the Consumer Federation of America, part of their brochure Cutting Through the Confusion.

■ What services do you offer?

■ What qualifications do you have to offer those services?

■ How do you charge for those services? Do you receive compensation from other sources if you recommend that I buy a particular stock, mutual fund, or bond?

■ Would my account be an advisory account or a brokerage account?

■ Are you required by law to always act in my best interests?  Will you put that commitment in writing?

■ What potential conflicts of interest do you have when recommending investment products to me, and will you disclose those conflicts?

■ Will you provide me with a written record of any disciplinary history for you and your firm?

■ Will you give me your Form ADV (the registration form that must be filed by investment advisers) and/or your Form U4 (the registration form used by persons who work with brokers)?