How To Choose A Financial Advisor

By: Jonathan H. Porter, Esq. CEO, Three Bell Capital LLC

For many successful families, the financial turmoil they endured over the last several years has exposed serious deficiencies in their financial advisors. Whether it was a lack of communication, action, or expertise, many advisors left their clients significantly underwhelmed at a time when they were needed most. As a result, many investors are seriously considering moving their assets to a different advisory team. However, as you consider your options, it is important to understand that the changing economic landscape has also had a profound effect on the financial services industry. Sophisticated financial advisors understand that the unprecedented global stimulus, fiscal, and monetary policies promulgated by various worldwide government entities to combat a collapsing economic system, coupled with the resulting meteoric market recoveries, have created a financial environment that no one has ever navigated. These changes have substantially impacted the nature of the services provided by financial advisors and the means by which they work with their clients. Smart financial advisors recognize that what worked well in the past will not necessarily work well going forward and, as a result, have adapted their practices to better meet their clients needs. This has, in turn, altered some of the critical factors by which you as an investor should evaluate a new financial advisor in what we have come to call the new normal. The checklist below highlights some of the most important factors in evaluating a new financial advisory relationship and will help you better identify what you should look for as you begin your search for a truly world-class financial management team.

1. Fiduciary Responsibility: First and foremost, a financial advisor should be required to always act in your best interests, no matter what. This sounds as if it should be self-evident, but in a world where there are a multitude of different investment products and strategies, very few of which are completely transparent, financial advisors are constantly presented with the opportunity to choose what is most profitable for them instead of what is best for their clients. Ultimately, whether or not an advisor will put their clients first before themselves is a matter of personal integrity. However, you should seek out an advisor who is held to a fiduciary standard of care with respect to the advisors financial interactions with you. In the investment world, Registered Investment Advisors (RIAs) are held to a fiduciary standard as mandated by the Investment Advisors Act of 1940, whereas stockbrokers and large investment banks are held to a suitability standard. The key difference is, a fiduciary must always act in the best interests of the client, whereas a broker subject to a suitability standard is only required to make sure the investment is reasonable based upon the clients time horizon and risk profile. As you can imagine, there are many cases where an investment is suitable for a client, but not necessarily in their best interests, particularly where fees are concerned. This can be mitigated by seeking out an advisor that is a true fiduciary, which means an RIA.

2. Comprehensive Approach: Many financial advisors are, in reality, stockbrokers. Whats the difference? A stockbroker will help you choose investments that they feel are appropriate for your portfolio. A true financial advisor will help you with all aspects of your financial life, with your investment portfolio being a constituent component. There is a vast difference between the two. A stockbrokers involvement in your finances terminates with investment management and is focused solely on your portfolio. Unfortunately, this type of advisor often makes investment decisions in a vacuum of relevant information about your life that could have direct impact on how that portfolio should be managed. Instead, look for an advisory team that takes a more comprehensive approach to advising. Your team should have a solid fundamental understanding of investing across multiple disciplines and asset classes, as well as expertise in estate planning and intergenerational wealth transfer, charitable giving, taxation, and how all of these interact with one another in the context of your personal situation.

3. Team Structure: If you are looking for a comprehensive financial entity that has the ability to handle both investment consulting and advanced planning, then you need to look for a team of financial advisors, not just a single advisor. It is nearly impossible for a single advisor to track and manage all the variables in a clients life that impact a comprehensive plan, much less do so across multiple households. Moreover, it is equally unrealistic to expect a single advisor to be able to develop sufficient expertise across all disciplines such that they can effectively advise on how those issues interrelate and impact the client. It takes several advisors working in concert with every client in order to effectively develop and maintain a comprehensive financial strategy. Make sure you seek out this type of organizational team structure as you evaluate advisors and firms. 4. Defined Process: Process is often overlooked when investors are considering a new financial advisory relationship, however they do so at their peril. An advisory team with the expertise necessary to provide comprehensive wealth management will still fail without a clearly defined consultative process. Your advisory team should be able to articulate not only the process by which they engage their clients and understand their initial needs, but also how they work with them on an ongoing basis and keep everything on track going forward. Beware glittering generalities used to describe an advisors process. A true process-oriented team will have a very well-conceived, clearly articulated, defined process that they engage for every client. While various clients may be at different stages of the process based upon their length of interaction with the advisory team, the process itself should remain both logical and consistent. 5. Open Architecture: With respect to the investment and portfolio management aspect of financial advisory services, your team is only as good as the investments available to it, and therefore its clients. Almost any platform will provide you with basic access to a wide variety of mutual funds, individual stocks, and various fixed income instruments like bonds or CDs. However, the reality is that the new normal is going to require advisors to employ the best separate account managers and increasingly sophisticated investment structures, often called alternative investments, in order to maximize risk-adjusted returns. Make sure you choose an advisory team that operates on a platform with an open architecture that enables them to go anywhere and do anything with respect to the investments they make on your behalf. Many wirehouses in particular limit their advisors to proprietary investment vehicles that may or may not be best in class. Independent advisors have no such restrictions and are completely platform agnostic when it comes to investments.

6. Flat Fees: There are essentially three different ways that advisors can be compensated for their services. First, they can charge commissions on trades that they execute in furtherance of their management of your portfolio (the traditional method of compensation). Second, they can share in the fees that a third party investment manager charges the client for investing in its fund (such as mutual fund loads or placement fees). Finally, they can charge a flat management fee in lieu of commissions or third party revenue sharing. Focus your search on advisors whose sole source of compensation is a flat annual management fee that is clearly delineated from the custodial and third party manager fees on your billing statement. A flat fee arrangement is generally the most beneficial for the client because it means your advisory team is compensated at the same rate no matter what investment they recommend you adopt. This eliminates any temptation or incentive for the advisor to place you in investments that pay them more, or trade excessively in your account to generate commissions. The result is an advisory team whose compensation is more closely aligned with your individual goals and investment performance. 7. Experience and Credentials: At the end of the day, you want an experienced financial advisory team. The reality is, it takes years of professional training and real world experience with the capital markets before an advisor is able to adequately deal with the multitude of complex issues facing a client. This is particularly true if you heed my earlier advice and seek out a team that takes a comprehensive approach to wealth management. Professional designations, such as a CFP, CIMA, or CFA are valuable and generally represent a higher level of competence, but not always. More importantly, look for a team that has been advising long enough to have been through multiple market cycles with their clients and therefore better understands how to advise in a variety of complex situations and environments. However, avoid advisors who appear so set in their ways that they are unable to adapt their management strategies to an ever-changing and increasingly complicated economic environment. It will take creative thinking and open-minded critical analysis in order to prosper in the new normal. Make sure your financial advisory team is up to the task. 8. Professional Network: Sophisticated comprehensive financial advisory teams deal with other financial professionals on a daily basis. As a result, they have an extensive professional network and can provide direct referrals to trusted sources for some of the most critical financial decisions you face. This can include everything from referrals to estate planning attorneys and CPAs, to insurance and risk management professionals, and even mortgage consultants. Equally valuable, a comprehensive wealth management team will typically know if you're paying too much for something or not getting a competitive rate, and can advise you accordingly. Ideally, an advisory team will not only help you manage your investments, but will also help you reach your goals and make other major financial decisions throughout your lifetime though introductions to other quality professionals within their network and helping to coordinate the efforts of that extended team.

9. Specialization: Finally, look for a financial advisory team that has specific experience and clients that are similar and relevant to your particular situation. If youre an entrepreneur or a corporate executive, look for a team that specializes in dealing with the financial issues that face those individuals. There are often issues and complexities associated with a particular type of client that an experienced team will know how to address because of the multitude of similar clients with which they already work. Equally important as specialization, is the number of clients that an advisory team represents. On average, a single advisor in one of the large wirehouses represents approximately 500 clients. Think about how much attention you will command as one of 500 clients. Unless you have a substantial portf olio, its unlikely you will enjoy much if any personal attention in that situation. Instead, look for an advisory team that purposefully controls the number of clients they represent and has a clear understanding of the maximum number of families they can represent without sacrificing service. About the Author Mr. Porter is the Founder and CEO of Three Bell Capital, a boutique private wealth management firm with offices in both Los Altos and San Francisco, California. Three Bell Capital focuses on working with entrepreneurs who are growing their companies, and are about to, or have recently experienced, a life-changing exit. For these clients, Three Bell Capital will help them develop a plan for their wealth that includes asset management, estate planning, tax strategy, insurance coverage, and lending. Where applicable, Three Bell will also assist companies establish, transition, or optimize their corporate retirement plans, and in targeted instances create liquidity for founders and key employees in advance of IPO and acquisition by facilitating individual private placement transactions with institutional buyers. Mr. Porter holds a Juris Doctorate, Magna Cum Laude, from the Santa Clara University School of Law, a B.A. in Political Science and English from the University of Washington, is a member of the State Bar of California, and holds Series 7, 66, and CA insurance licenses.

IRS Circular 230 Disclaimer: Nothing contained in this article was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended; any written statement contained in this article relating to any federal tax transaction or matter may not be used by any person to support the promotion or marketing or to recommend any federal tax transaction or matter; and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter contained in this article. No one, without Three Bell Capitals express writ ten permission, may use any part of this article in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers. Copyright Notice: Copyright Three Bell Capital 2013, all rights reserved. This work is the intellectual property of Three Bell Capital. Permission is granted for this article to be shared for non-commercial, educational purposes, provided that this copyright statement appears on the reproduced materials and notice is given that the copying or electronic retransmission is by permission of the authors. Trademark Notice: Three Bell Capital and the Three Bell Capital logo are the registered trademarks of Three Bell Capital LLC, and may not be reproduced except as part of this article in its original form, without the express written permission of Three Bell Capital.