When I talk to students who take NAOI investing courses one of the questions I ask is “How do you select an investment advisor?” Most students tell me that they do so essentially in a very cavalier manner – based on TV or print ads, free dinner seminars by a local firm or via a reference from a family member or acquaintance. The most common thing I hear is that “they all look alike.” And there is a misconception that they all provide pretty much the same products and services.
Well, nothing could be further from the truth and selecting to work with the wrong “type” of advisor can have serious consequences to your financial future.
As an investor you must understand a key difference between two basic advisor types that offer different levels of advice. They are as follows:
Fiduciaries – These are advisors who MUST put your interests ahead of theirs. For example, if they recommend to you a mutual fund based primarily on the fact that it gives them a higher sales commission when another, equal, mutual fund is available then they are breaking the law. Fiduciaries generally charge either flat fees for advice or a percentage of your portfolio assets – perhaps 1%.
Broker / Advisors – These are advisors who are only required to make recommendations that are "suitable" for your risk tolerance level. They CAN recommend to you a fund that gives them higher commissions than another equal fund as long as it is suitable for your risk profile without breaking the law. Such advisors typically are paid based on trading fees and sales commissions.
As an individual investor you should prefer to work with an advisor working under the fiduciary standard. But often they have minimum account value requirements – e.g. $200,000 or more. This is one of the great injustices of investing today – only well-to-do investors have access to the best advice possible.
I want you to go to this site: www.FiduciaryPlege.com and study it in detail. It will enable you to determine the type of advisor you are working with or considering. And it explains the whole concept with important pledge documents that you should get signed. This is important stuff. And please thank the person responsible for creating this valuable site.
Oh, I almost forgot. Please make sure that any advisor you are considering, or heaven forbid the one you are working with now, is not a crook. Do this at www.BrokerCheck.com.