It’s critical that we all invest in the stock market one way or another. I’ve written about doing investing on your own; however, some of us may want to work with a financial professional who will make recommendations to us. This post is all about the important things to know on how to choose an investment advisor wisely. Be sure to also check out our post on eight important questions to ask a financial advisor, as well!

I am an expert in this space, as I audited financial professionals for over a decade. I saw all kinds of business types. It’s my perspective that 95% of the industry is doing their best; and in my previous work it was my job to identify the 5% doing wrong by others. In this work at MPower Co, it’s one of my missions to help you be savvy no matter who you work with. 

Whether you’re looking for an insurance agent, an estate planner, tax specialist, mortgage broker, financial advisor, etc., there are expectations and standards that you need to consider. No matter how someone fits into your financial team, no matter their niche, it’s important to be confident in them.

The following are five things to think about with respect to how to choose an investment advisor wisely!

1. Work with individuals that care about your goals.

Each person you work with needs to provide services based on your needs and goals. Dr. Thia, MPower Co’s Director of Education, shares a story about how decades ago she walked into a financial professional’s office. That person started a standard pitch about his services. Dr. Thia gave him a moment, and then piped in with her goals. He stopped her and made it clear that it didn’t matter. “I’ll tell you your goals,” he said. She immediately got up and walked out. 

You may not know exactly what would work best, because you aren’t and don’t have to be experts in every financial area; however, you are the expert when it comes to your goals. You know what you want to accomplish and you know your comfort level when it comes to different types of investing. So, no matter who you are working with, they need to put your goals and needs first. 

2. Ask people you trust for recommendations.

Just like you would ask for recommendations on electricians or a doctor, ask friends and family in your area for recommendations. Unless you know someone personally, ask around and review and interview multiple candidates for the job. This is to ensure that you find the right person for you. 

Just because you get a recommendation from someone, though, doesn’t mean it is a good fit for you. Don’t settle. Just like a CEO likely wouldn’t just interview one person for a job, take time to do a search to find the right one that meets your needs and can meet you on your level. 

3. Review people’s qualifications and track record. 

Do your due diligence on anyone you are working with. Take time to google their name, search their social media sites, review registration sites (one of my favorites is FINRA’s Broker Check for financial professionals) for customer complaints. Know why they chose their career path and what they’re about. If you are looking for an investment professional for the purpose of helping you manage your retirement investments and their niche is day trading (also called high-frequency trading), and you aren’t interested in that type of activity, then it’s not a good fit. 

A great example of this is the recent Reddit trading activities. Recently, a group started trading and there was one firm they heavily favored doing the trading through. One of the reasons they began engaging in high-risk trading was to try to make hedge funds loose money. The firm that they favored trading through was funded by money from hedge funds. Yes, on that firm’s “about page” it says very clearly they sold technology to hedge funds and that was the source of funds for starting the business. The investment company halted trading in stocks that the Redditers were trading. This is a sophisticated scheme, but I hope you get the irony and clear issues with trading through this firm whose owners are likely friends with hedge fund companies. 

4. Work with people that individualize their services. 

Continuing with the story of Dr. Thia, the pitch to her was clear that the financial professional knew best and that he was working to be her “financial parent.” It is a red flag to me when someone has a one-size fits all model for all customers. If you’ve tried one size fits all clothes, it’s the same in most financial services with cookie-cutter approaches. 

We are not the same, our resources, needs, and goals are not the same. We may all need car insurance, but the deductible I’m comfortable with may not be the same as yours. My last employer paid for roadside assistance, but yours may not so you may want that included in your car insurance. These are small examples, but they illustrate the point to find someone that will individualize their services for you. 

5. Work with people that fit your needs without breaking the bank. 

I have a client whose life work is in teaching. After graduating college, she was approached by an investment professional. The investment professional talked with her about investing and putting money into the stock market. My client already understood the value of saving and investing. 

The investment professional told my client that they would need at least $15,000 to invest in order to begin working with the professional. My client, at the time, would have taken a few months to put together $1,000, let alone $15,000. Clearly this professional relationship was not a match. 

There are good people that want to work with you, no matter the balance in your account. So, find the right fit for the amount you can spend. Shop around.  If one professional is not a good fit, just think of that as a sign you are one step closer to finding the right fit. Don’t let it discourage you. 

How to Choose an Investment Advisor Wisely: Know Their Business Model

I titled this post with investment advisor in the title, but I really hate using that term because it is actually very specific to a specific financial professional. Knowing the financial professionals business model is important because it helps you understand what they can and cannot do and also how they get paid. Knowing their incentives can help you ask important questions. One business model is not better than another for financial professionals. They are simply different. It comes down to your personal preference on what works best for you. 

Captive Financial Model

Captive professionals are employees of the company that they work for. That company has one set of their own products (called proprietary) that they sell. 

Because the agent works for the company and there are only a specific set of products available, agents are typically experts at that set of products, discounts, and coverage add-ons that may need to be considered. Their commissions are typically less because generally speaking (not always) captive agents are also paid a salary on top of their commissions, especially if they are in the first few years of their career. 

However, that doesn’t mean that the policies or products are generally less expensive to you. Someone has to pay for the salary, marketing, and internal corporate structure. You’ll typically work directly with someone within the corporate structure if there is a claim, and not necessarily your agent.  

Independent Contractors

Independent contractors on the other hand have the ability to partner with a plethora of insurance companies or have more flexibility on the types of investment products they solicit. 

Independent agents have greater ability to shop around on your behalf, compare rates and features in the insurance space or fees and track record in the investment world. This gives you more options, and may lower your costs. More competition for agents to sell products, typically means lower fees. 

However, there is a lot greater variability within the independent contractor models of companies. Because there isn’t a limited amount of products, one agent to another can be very different on what they recommend is suitable for your needs. Also, because they aren’t as specialized in the products they sell they may not know the ins-and-outs of features in products as well as captive agents might. They may also be influenced more by wholesalers (people whose job it is to educate financial professionals on certain products) and sales incentives. 

There is also more variability in how claims are handled. Some independent contractors will make themselves the point person with the company. Others will direct you to the company you hold your policy with.

Direct to Customer Sales Model

This is the newest model on the financial block. This is the you do most everything yourself model. You review policies or investment products yourself and you choose which fit your needs. Most relationships in this model are solely web based. There is little guidance and little support. 

The upfront costs of these companies may be lower than their counterparts, but you’re going to have to be a lot more confident in knowing what it is you need and be more well versed to ensure you’re covered adequately and investing in products suitable for you.

If you have insurance claims you’re likely going to have more hoops to jump through, and on the investment side you have no one making recommendations or pushing you to sit steady in the boat (remember, it’s time in the market that matters, not timing the market). 

Another Blog Post on Financial Professionals!

I mentioned this at the outset of this blog, but I hope you were so excited about the content here, that you didn’t click over to there! I previously wrote a blog on eight important questions to ask a financial advisor, so head over to that post to read it, as it supplements and has additional supporting information to this post!

Free Resource – Becoming a Millionaire Next Door

f you found this article on how to choose an investment advisor helpful, grab a copy of our free resource on becoming a millionaire next door. Becoming a Millionaire Next Door takes focus and time and using money wisely, and avoiding financial headaches that can get you on your way to becoming a millionaire quickly! Click on this link to get your free download to be more financially savvy.