Wealth managers agree there are key considerations to make when shopping for an adviser to help with investment portfolios. The top considerations include fees and compensation, qualifications and trust.
Bob McCormick, CFA, executive vice president and chief operating officer of the Trust Company of Oklahoma, 6120 S. Yale Ave., Suite 1900, and Nick Harroz III, CPA, registered investment adviser and president of Mark I Asset Management, an Oklahoma City-based wealth management firm serving clients throughout the state, offered a few shopping tips:
Fees and Compensation
Understand how an investment adviser is compensated.
“One of the top things would be to have full and complete disclosure of all fees,” McCormick said. “There needs to be transparency on fees so you can make sure that your adviser’s interests are aligned with yours.”
Investors should seek financial advisers who are not paid by commission and pursue those paid on a fee-only basis, Harroz said.
“Under a fee-only approach, investors will pay a percentage of assets under management,” Harroz said. “Typically, these fees start at 1 percent and decrease as net worth increases.
“There could be a nominal cost for transactions, and these advisers should use versions of mutual funds that do not use 12B-1 fees or loans. This is a transparent process that allows investors to see exactly where their money is going.”
Investors should seek qualified investment professionals and look for designations, such as CFA (certified financial analyst), CPA (certified public accountant) and CFP (certified financial planner).
“Investors should also ask about a financial adviser’s background — educational and professional,” Harroz said. “From an educational perspective, investors should seek professionals trained in finance, accounting, economics or law. From a professional perspective, investors should seek advisers who have experience and a track record.
“Making sure your financial adviser has the education and the professional standing is critical,” said McCormick, noting the portfolio managers at the Trust Company of Oklahoma are CFAs. “We think those qualifications, those certifications and professional designations are important because anybody can hang out a shingle and call themselves an adviser.”
Even if someone is registered as an investment adviser with the Securities and Exchange Commission, “that may not be the most rigorous oversight,” McCormick said.
“The SEC is not putting its seal of approval on any financial adviser,” he said.
Obviously, investors should have trusted advisers.
“You need to be comfortable with your investment adviser on a personal level,” McCormick said. “When the market turns bad or something happens, it may be a more difficult relationship because you weren’t comfortable going in.”
He suggested clients set a face-to-face meetings with a potential advisers. Treat your decision like selecting your doctor, he said.
“The financial adviser may be the most brilliant person around, but if there is no chemistry there, you may start questioning his advice when the market turns down,” McCormick said.
Referrals from other trusted professionals, such as CPAs and attorneys, are a good way to locate trusted advisers, Harroz said. Also, when meeting initially with a financial adviser, an investor should ask the adviser to have a detailed plan prepared based on his or her individual needs. Then, the investor should request a second meeting so the adviser may explain why the plan is appropriate for the investor’s needs, Harroz said.
Especially in this economic environment, investors should understand how an investment advisory firm is regulated, McCormick said.
“Regulatory oversight is very important,” he said. “For instance, we actually have had four banking regulators overseeing us. The Oklahoma Banking Commission is our primary regulator, but we serve as the trust department for several banks in the area — and we have served for others in the past — so we have had the Federal Reserve, the comptroller of the currency and the FDIC all in our offices at times because when they look at those banks, they look at us.”
He said another key issue requiring attention involves third-party custodians.
The custody rule proposed by the SEC requires, in part, that RIAs with custody of a client’s assets maintain those assets with a “qualified custodian,” McCormick said.
“The term, in general, includes most regulated banks, broker dealers and other financial institutions providing custodial services,” he said.
“While we contract with a separate custodian, since we are in the banking system, we can act as custodian for our clients’ money,” McCormick said. “It’s really the registered investment advisers and unregulated hedge funds that truly need that third-party custodian.
“When you are shopping, you need to discuss the custodian issue with your potential investment adviser and determine what regulation they fall under,” he said.
He also urged clients to study a proposed investment plan to make sure it makes intuitive sense.
“(Bernard) Madoff was basically running a black-box investment plan that people bought into because he had consistently strong results, but the plan itself didn’t intuitively make sense to a lot of people that looked at it,” he said. “Many of those people closed their eyes to that red flag and did it anyway because of the returns.”
Not only should a plan make intuitive sense, McCormick said, but investors should also let returns fully guide their decisions.
“If people adhere to those guidelines, they will probably avoid a lot of problems,” he said.