What Will a Good Investment Adviser Do for Me?
Investment advisers manage money. They select financial assets—like stocks, bonds, and mutual funds—and then buy, sell, and monitor them within your account in keeping with your investment goals. Investment advisers generally have discretionary powers over your account: By engaging them, you give them general authorization to trade for you, without consulting you before each transaction.
Some investment advisers work in a holistic way, looking at all aspects of your financial life and putting together a comprehensive investment plan—a procedure often called "wealth management." Other investment advisers have a more narrow focus, such as expertise in dividend-paying stocks or municipal bonds. It is common for a wealth management investment adviser to hire narrowly focused investment advisers to manage certain parts of a client's portfolio. He coordinates their efforts while acting as the point person for the client.
Investment Advisers Vs. Financial Planners
Although there is some overlap, investment advice is different from financial planning. Financial planners deal with matters such as savings and budgeting, mortgages and loans, and life insurance; when they advise on investments, it's usually mutual funds rather than specific securities. Some financial planners may also be stockbrokers and able to trade for clients. But they rarely have discretionary power over an account.
Distinctions between the two often blur because some investment advisers—especially the wealth-management type—offer basic financial planning advice, and a few offer comprehensive financial planning as well as investment advice. Like financial planners, investment advisers must understand your basic financial goals, requiring information about when you will need to use your money and what you will use it for. They must gather personal and financial data about you, taking the time to understand your tolerance for risk, your expected rate of return, and your financial capacity to incur any investment losses.
Topics to Cover with an Investment Adviser
An investment adviser focused on wealth management discusses specific issues when structuring your portfolio. In particular, she might tell you:
- What to invest in
- Whether to buy stocks or mutual funds
- If you should invest in index funds or actively managed funds
- Which investments to use inside of your retirement accounts
- Which investments you should own in nonretirement accounts
- What risks are associated with each investment
- What expected rate of return you might receive from your portfolio
- 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
Narrowly Focused Investment Advisers
Sometimes you might need the services of an investment adviser with a specific type of specialty, as opposed to one with a view toward overall wealth management. Some examples:
- You own a lot of a company's 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 adviser who specializes in constructing this type of portfolio.
How Investment Advisers Charge
Most investment advisers charge an annual fee that is a percentage of the assets managed on your behalf. This percentage is usually higher for smaller portfolios and shrinks as the portfolios get larger. A general range would be 2 percent a year for a $100,000 account, scaling down to 0.5 percent a year for accounts that are $5 million or more.
Instead of, or in addition to, asset management fees, some investment advisers 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
- A combination of fees and commissions
Always ask investment advisers for a clear explanation of how they are compensated. Every investment adviser is also required to provide you with a disclosure document, drawn up in accordance with requirements of the Securities and Exchange Commission (SEC). Officially called the Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Adviser, it includes a section, known as Form ADV Part 2, that discloses their compensation formulas and any potential conflicts of interest.
The Bottom Line
Investment advisers' styles and strategies vary tremendously. In general, though, an adviser should always offer a clear, easy-to-understand description of her basic money-management approach. She will want to know where all your investments and accounts are—even the ones she is not managing—so that your portfolio as a whole makes sense, neither duplicating nor working at cross-purposes with your other holdings and assets. She will not make recommendations until she understands your time horizon, your level of experience with investments, your goals, and your tolerance for investment risk. More than likely, unless you're a client who thrives on risk, she will not suggest that you put all your money in a single narrowly focused investment, like an oil well in Venezuela.