How to Choose a Good Investment Adviser

In last week's blog post, I discussed "Should You Rollover Your 401(k) into an IRA?"  In making up your mind how to invest your 401(k) or IRA savings, many retirees will want to enlist the aid of a good investment adviser.  However,  with 300,000 financial advisers in the United States, how do you know if you are choosing someone reputable and who will give you the best advice?

In addition to getting the best investment advice, you also want to make sure you follow IRS tax guidelines so that you do not needlessly pay taxes on the proceeds.

Some advisers will push you to make decisions that are in their best interest, not necessarily yours.  For example, they may push you out of a 401(k) with a Fortune 500 company into an IRA, simply because they can charge you higher fees once your money is in an IRA.  While there are times when you may be better off in an IRA, you do not want to make the change simply because your adviser wants to earn higher fees.

How Can You Choose the Best Investment Adviser for You?

*  Ask the adviser you are interviewing a lot of questions.  For example, if they want to switch your plan so they can invest your savings in certain types of stocks or bonds, ask why that can't be done in your current plan.  Make sure you get satisfactory answers to all your questions.  Go home and think about what they said. You may want to interview another adviser, as well, to see if they give you similar advice.

*  Find out how the adviser is paid.  If he works for a brokerage firm, bank or insurance agency, it is likely that he is being paid primarily from commissions on the products that he sells you.  If he is a registered investment adviser, he is likely to be paid an annual percentage of the assets under management.  Some advisers charge a one-time up-front fee in the range of $800 to $1500 and, in return, they do not get commissions on products and they do not receive an annual fee on your assets that are under their management.  Some advisers are paid in several different ways.  You want to make sure you fully understand how the adviser you choose will be paid.

*  Try to determine the biases of the the investment manager you are considering.  Are they trying to steer you towards certain products because the commissions are larger for them?  Are they trying to switch you out of a perfectly good 401(k) into an IRA because they can then charge an annual fee for managing your assets?  Are they opposed to certain types of financial vehicles, like annuities or exchange traded funds, even though you are interested in including them in your portfolio?  Is their comfort level with risk similar to your own?

*  Make sure you understand what commissions you will be charged, up-front and in the future.  How do the fees and commissions compare to the return that you can expect on your money?  There is no point in paying a money manager so much that you barely get any return on your assets.

*  Ask the adviser about all the services they provide.  There could be a benefit to choosing an adviser who can help you with tax and estate planning, for example.  You also need to talk to them about the types of investments they prefer and make sure that their style is compatible with yours.  Are they more or less aggressive than you are?  You should also ask for their Form ADV Part II Brochure which will describe their services, fees and investment strategies.

*  Finally, but perhaps most importantly, DO A BACKGROUND CHECK. Countless people have been cheated by advisers who have a checkered past.  The first thing you should do is enter their name into FINRA Broker-Check at finra.org.  This will give you information on any "disclosure events" such as disputes with customers and, more seriously, felony convictions.  You may also want to do a Google search on their name to see if there are any other red-flags that you will want to know about.  If they are a principal in a small firm, do a Better Business Bureau check and a Google check on the name of the firm to make certain that people have been satisfied with the services they provide.  You literally cannot be too careful.

While following this advice will not guarantee that you are getting the best advice possible, it will help lesson the chances that you will run into problems.

Sources:

"The One Retirement Move You Must Get Right," Money Magazine, July 2014, page 44.

You may also want to read:

"Should You Rollover Your 401(k) into an IRA?

If you are planning to retire soon, you will also want to check out the tabs at the top of this article.  They contain links to hundreds of additional articles on financial planning, where to retire, medical concerns and family relationships.

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