How do I know if my investment advisor is recommending prudent investment options?
[ken bower, principal, moneta group]
“An advisor needs to understand your entire life situation before offering any suggestions, including your age, income, marital status, children, education costs, insurance needs, etc. He or she needs to know and respect your goals and your comfort zone regarding risk. When you’re trying to evaluate advice, ask yourself whether the investment option proposed is in your best interest, or the advisor’s. For example, some advisors receive commissions or incentives for recommending certain products. This recommendation might not be the most suitable or prudent investment option for you, unless it’s aligned with your goals. So make sure you’re comfortable communicating with your financial professional. Don’t be afraid to ask about the costs involved, and how the advisor is compensated. The easiest way for the client to know about commissions or incentives is to ask the advisor if he or she is 100 percent fee-based, as opposed to commission-based. If the answer is no, then to some extent there is not a perfect alignment of interests. An advisor should be knowledgeable and scrupulously honest. Avoid anyone who is a ‘hot stock picker.’ Find someone who’s willing to map out a long-term plan based on your unique situation.”
[maurice quiroga, managing director/executive vice president, pnc wealth management]
“Every advisor has their own approach to investment recommendations, and it’s best to ask a lot of questions and interview a lot of advisors. Choose a firm that has been around a long time and has the expertise and depth you need. To determine if you’re receiving prudent recommendations, first understand where your advisor works. Trust company advisors are required to follow the ‘prudent man rule’: they have an obligation to use reasonable care and skill to preserve the trust property and make it productive. Trust companies typically have buy-side research departments to help their advisors with asset allocation discussions. These advisors have strong teams to help them make portfolio and strategy recommendations for their clients. Some broker-dealers, on the other hand, are paid by the product or investment they recommend, and many of them choose their own company’s products or base their recommendations on public research. Ask your advisor to disclose the entire fee they make on a trade, and ask them to disclose what they earn on mutual funds. This transparency can shed light on what really is prudent for you and your family. Also, keep in mind that if the advisor’s claims seem too good to be true, they probably are.”
By Toni Di Martino