Choosing an Investment Advisor

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The world of investment management has been changing over the past 10 years with the evolution of boutique investment practices. This has also added to the confusion an investor faces when trying to decide on the type of firm and advisor to work with. This article attempts to break down the differences between large and small investment firms and provide some guidance on the questions an investor should ask when interviewing advisors.

The Big Banks, Brokerage Firms & Trust Companies When people think about investment firms, typically the big Wall Street names come to mind first. These are globally recognized brands in the public consciousness. They have big advertising budgets. They have their names on office buildings. They have thousands of employees, including research analysts and money managers. They often appear on the investment talk shows. Some people find comfort in all this.

But big companies do tend to be more impersonal, as employees come and go. Proprietary products can be perceived as a conflict of interest for the bank or trust company. Mandates within brokerage firms can drive certain product sales. This can result in cookie cutter investment plans for clients.

From my experience the smaller clients at these larger firms – the clients with less than $3 million or in some cases $5 million – are often overlooked. Some firms go so far as to have mandates about how many times an officer can talk to a client during the year, based on the size of the investment relationship. Furthermore, many alternative investment products outside of the traditional cookie cutter stock and bond funds are often not available to clients below a certain level of assets under management. Knowing that level is an important question to ask.

The Smaller Independent Investment Firms The smaller firms don’t have near the marketing budget of the big Wall Street firms. They are not sponsoring major community and sporting events. They don’t advertise in major publications and media. Instead of the building downtown with their name on it, they often have more modest facilities and have built their businesses themselves through word-of-mouth and personal recommendations.

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They often have more flexibility to choose the products they offer and the freedom to not be encumbered by managerial policies in a large corporate environment. And, you will often find an impressive level of personal service when working with an independent advisor.

While small firms have access to many of the same investments that the big firms have access to, the lack of a brand name can turn potential clients off, but that should not be a sole determinant of an investor’s selection. There are some services an investor will most likely not be able to find at a small investment shop, like being able to take part in initial public offerings. But, I find that most small investment shops have strategic partnerships with other providers so they can offer the investor many of the services of the bigger Wall Street firms.

Questions to Ask

Key things to ask when hiring an investment provider: • What services and products do they offer? • Do they focus on just mutual funds? • Do they invest in individual securities and is that right for you? • Do they have alternative investment options? • How flexible or customized can a portfolio be with them? • Is the firm offering a discretionary or non-discretionary account?

Also, how does the investment advisor get paid? Commissions? A percentage fee? A combination of both? Many investors feel that a fee-based system is more in line with a client’s investment interests than a commission-based approach. Furthermore, does the advisor have a certain type of client that they focus on? What will be the tax impact to the investor in going with this firm? The investor should understand the investment advisor’s philosophy and how they distinguish themselves from their competitors.

Furthermore, I think it is important for the investor to understand the advisor’s background. Where did they get their experience? How long have they been investing? What is their educational background? Do they have any special certifications?

The investor should understand what services he or she is going to need and compare them with the services being offered by the firm.

Interviewing different investment firms to find the best fit for an investor is vital. The best advisors are good listeners. Ultimately, the decision about whom to trust should be based on what the advisor can do for the investor, not on a brand name and advertising. Gene C. Sulzberger 

Golf Expert Witness

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