What Will a Good Investment Advisor Do for Me?
Investment advisors can help you stay on track
Investment advisors manage money. They select investments, like stocks, bonds, and mutual funds, and purchase these investments in your account (with your authorization of course).
Some investment advisors work in a holistic way looking at all aspects of your financial life and putting together a comprehensive investment plan. This is often called "wealth management." Other investment advisors have a narrow focus, such as being an expert in dividend paying stocks, or municipal bonds.
Like financial planners, the wealth management type of investment advisor must understand your basic financial goals. This means they need to know when you will need to use your money, and what you will use it for. They must gather personal and financial data about you. They should take the time to understand your tolerance for risk, your expected rate of return, and your financial capacity to incur any investment losses.
A holistic investment advisor will use this data to analyze your existing investments and make recommendations about what you should do going forward.
A narrowly focused investment advisor will usually not put together a holistic plan. Instead, they focus on sharing their strategy and results within their area of expertise.
It is common for a wealth management investment advisor to hire narrowly focused investment advisors to manage certain parts of a portfolio.
What type of advice can a holistic, wealth management type of investment advisor give me?
An advisor focused on wealth management will tell you:
- What to invest in
- Whether to buy stocks or mutual funds
- If you should use index funds or active fund managers
- Which investments to use inside of your retirement accounts
- What risks are associated with each investment
- What expected rate of return you might receive from your portfolio
- Which investments you should own in non-retirement accounts
- What types of taxable income your investments will generate
- How you can rearrange investments to reduce taxable income
- What taxes you will incur when you buy or sell investments
When would I want a narrowly focused investment advisor?
I can think of a few examples where someone might need an investment advisor with a specific type of expertise. Here are few:
- You own a lot of company stock and need to find someone who writes options, or covered calls on this stock.
- You inherit a large portfolio of stocks or bonds and need to find someone to help you manage these assets or sell out of them.
- You want to create a bond ladder for retirement income and need to find an investment advisor that specializes in constructing this type of portfolio.
How do investment advisors charge?
Most investment advisors charge a fee that is a percentage of the assets that they manage on your behalf. This fee is usually higher for smaller accounts, and lower for larger accounts. A general range would be two percent a year on the high side for a $50,000 account, scaling down to a half of a percent a year for accounts that are $5,000,000 or more.
Instead of, or in addition to asset management fees, some investment advisors may charge in any of the following ways:
- An hourly rate
- A flat fee to complete a review of your existing portfolio
- A quarterly or annual retainer fee
- Commissions paid to them from financial or insurance products you buy through them
- A combination of fees and commissions
How can I know how my investment advisor will be paid?
Always ask an investment advisor for a clear explanation of how they are compensated. The best advisor will give you a plain English explanation that you can understand. Every investment advisor is also required to provide you a disclosure document called an ADV PART TWO. This document discloses their compensation formulas and any potential conflicts of interest.
Tips on what to look for in an investment advisor
In general, look for the following "dos" and "do nots" when searching for a holistic investment advisor.
- Do: Want to know where all your investments are so that your portfolio as a whole will make sense. Otherwise, you may end up owning the same type of investments in different accounts.
- Do: Offer a clear, easy-to-understand description of how they are compensated.
- Do not: Make recommendations until they understand your expected time horizon, your level of experience with investments, your goals, and your tolerance for investment risk.
- Do not: Suggest you put all your money in a single narrowly focused strategy, such as 100% in a certain stock trading strategy.
Do investment advisors also offer financial planning advice?
Investment advice is different than financial planning. Some investment advisors offer basic financial planning advice, and a few offer comprehensive financial planning as well as investment advice.
Ask a potential investment advisor if they offer financial planning services and if those services are included in their fee.