Thursday, August 24, 2006

how to check your investment advisor's background and learn if your advisor have any conflicts of interest?

I've begun the process of looking for a professional investment advisor, primarily to obtain objective thinking from a third party.

Also, I had been intrigued with some of the DFA offerings, which can only be obtained from investment advisors.

One fellow made the joke that the investment advisor's real job is to prevent the client from making bad decisions - if I had used an advisor earlier, I would have saved $6000 in losses on SNDA! Ah the value of hindsight!

In the process of interviewing my most recent advisor, he referred me to several government regulatory sites.

In general check and You can find specific disclosures at the SEC's Investment Advisor Public Disclosure web site, which you can visit here.

Several questions were interesting to me:
  1. How much was the advisor managing?
  2. Would he have time for me if he had too many clients?
  3. Is he making enough money to stay in the profession?
  4. Was his income coming from advisory fee-based services or investment management asset based fees? If so, how much from each?
  5. Are there any conflicts of interest - specifically commissions or ownerships in investments?

The forms are a bit much to go through, you do have to click around, but it was reassuring.

Does anyone have any other questions or points I should investigate when considering an investment advisor?

Have a wonderful day,


PS One of the key benefits from this approach will be the transition of our holdings from life cycle funds to more transparrent asset class specific index funds reballanced as necessary. From this approach we can consider all of our assets in a single asset management strategy, rather than retirement, non-retirement and college savings each with their own strategy.


Marc said...

We're debating whether or not to use an investment advisor for the same reasons you mentioned. One thing we're having a hard time reconciling is paying an ongoing fee for passive investing. Yes, you get access to DFA funds and an advisor to help you, but for passive, index-fund-based investors with a decent understanding of asset allocation, doesn't it seem hard to justify that advisory fee?

makingourway said...


For me the issues are two:

1. Having an objective third party removed from personal emotional issues to advise on financial strategy
2. I do not have the discipline to regularly rebalance


Jim said...

Makingourway, I question the value of an investment advisor to someone with more than basic knowledge of financial markets and investments. Is it really worth paying someone 1% of your assets (or whatever alternative fees you would incur) to purchase the same investments you could purchase yourself? I understand your point about the DFA funds and how you can only invest in them through an intermediary such as an investment advisor. However, if you are going to primarily invest in ETFs, is it really worth the hassel and expense?

makingourway said...

My primary investment will be through retirement accounts - less likely through ETFs in non-retirement accounts.
though I certianly will have some ETFs. I guestimate about 20% of my investments will end up in ETFs by year end.
There are many different investment products out there. I was very suprised to learn about the Bridgeway products, for example. I simply don't have enought time to stay on top of what's out there and worth investing in.
Altruist has a very nice table at their website listing best of breed products for different target asset classes. I'm paying for advice like that as much as for help rebalancing, financial planning, etc....

For me this is an experiment.

If it doesn't work, I move my money out after 2-4 years. How significant will the incremental cost be for that period. A few thousand dollars, but not that bad. A cheap price for a lesson learned (think of university classes at $3k these days). On the other hand, if it helps, I'll be especially pleased.