Tips for Finding the Right Investment Advisor Part I

Markets got you down? Now may be a good time to team up with a good investment advisor.

Andrew Horowitz
6-minute read
Episode #79

Shopping For An Advisor: You Get What You Pay For

At the grocery store, most people comparison shop. They are not likely to buy a $2.00 can of corn from one reputable brand when another equally reputable name is selling for $1.50. Unless, of course, you are dealing with a canned corn connoisseur. In that case the discerning consumer would more likely buy the $5.00 can that was imported from Europe. Choosing an advisor is a similar process and carries many of the same potential influences. Know this: when looking for an advisor, you usually get what you pay for.

Getting what you pay for, in this case, has a rather complicated connotation, especially considering that you are not just dealing with varying price tags. This time you are also dealing with varying pricing structures. It is true that highly regarded, experienced advisors tend to charge more than lesser known or inexperienced advisors. It is also true that the method of payment tends to complicate things. Financial advisors earn their income by charging their clients in one of the following manners:

  • Pay-per-trade
  • Fee-only
  • Fee-based
  • Commission-based

Pay-Per-Trade : This is a term that refers to any advisory practice that charges a rate for the simple act of trading a stock or other investment. The term “pay-per-trade” actually refers to the kind of online, self-directed investment approach covered in Chapter 8. Some companies employ advisors who may receive a base salary. In addition, bonuses may be based on the many thousands of flat-rate trading fees that the company earns every day from the clients that use their services. For the most part, this type of advisor is considered a “broker” and merely assists with your trades rather than providing advice.

Fee-Only : This term refers to the type of advisor that charges a standard hourly fee, a flat fee, or a percentage fee for his or her advice. Think of the way in which one pays a lawyer or psychiatrist. This sort of pay structure may also come with an annual fee associated with the types of investments that you and your advisor agree on. Most often, you will pay a percentage of the assets managed for ongoing advice and support beyond the initial consultation.

Fee-Based : This is probably the loosest term in the entire group. Fee-based advisors may charge a flat hourly rate plus a fee for managing your portfolio. In addition, investments purchased may pay a commission to the advisor. The degree of those commissions varies greatly between advisors and some firms will actually work in a manner closer to the category of fee-only than others. With this arrangement, clients will have the broadest range of investment options available to them.

Commission-Based : Anyone who has ever gone into a shoe store or car dealership knows that salespeople who live exclusively off of commissions are nothing short of relentless when it comes to their advice on products or services they represent. If they do not get you to “pull out the old checkbook” they do not make any money. It is essentially the same with commission-based advisors, who are paid only when you implement suggestions that they make on stocks, loaded mutual funds, insurance, or annuity products.

Which Investment Advisor Pricing Structure Is Best?

In summary, you can determine what to avoid in an advisor by following a few basic rules. The first is that while the online, self-directed advisory firms may be great for those who wish to maintain some degree of control over their own portfolios, when it comes time to offer expert advice, they tend to fall short. Basically, it is pretty easy to figure out that the advisors working for one of these services (with no commission, a base salary, and little motivation to perform well for the client) may not exactly be the “cream of the crop.”

The second point is that when dealing with a fee-only advisor (specifically those that charge by the hour) you may find yourself paying for some services that you do not really need. Look at an interior decorator analogy: it may happen that your new decorator takes a look at your entire home and tells you that everything is perfect and no changes are needed. More probable though, he or she will suggest all of the things that need to be updated and improved. Of course this service will be provided for an hourly fee. Even with that analogy in mind, the fee-only advisor is still an excellent choice if you are looking for ongoing investment management.

Choosing the pay structure best suited to you and your advisor gives you the greatest flexibility and control.

Then there are advisors that are primarily commission based. Imagine for a moment that you are in a mall shopping for shoes. You walk into a well-stocked retail establishment and find that it only sells brown shoes. The pleasant salesman walks over and asks if you need help. Let’s agree that you are most assuredly not going to walk out of there with a brand new pair of black shoes. No matter how badly you may want a black pair, the benefits and beauty of the brown shoes will be extolled.


About the Author

Andrew Horowitz Money Girl
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