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Financial Advice

Selecting an Advisor You Can Trust

One of the most important decisions an investor can make is the choice of a financial advisor. When making this selection, surveys show that along with the financial expertise of the advisor, investors look for someone they can trust. However, trust is an intangible quality; it cannot be quantified in the same way that one would measure the skills of an advisor. Fortunately, several criteria can help you with this decision. In addition, using them can help minimize the risks of potential conflicts of interest.

Question 1: What Is the Advisor’s Standard of Care?

In the financial services world, there are two standards of care: suitability and fiduciary. The SUITABILITY RULE states that a product or service must meet only the standard of being suitable for an investor— It does not have to be in an investor’s best interest. The FIDUCIARY DUTY standard is a much higher standard. It is generally considered the highest legal duty that one party can have to another.

Rule 1: The fiduciary standard is the preferred standard of care.

CAM's team: Ron Barnes, President; Greg Rogers,
Principal; Eric Kyreme, Portfolio Manager; Jay Conner, Investment Advisor.

Question 2: What Is the Advisor’s Compensation Structure?

Two common compensation structures are commission-based and fee-only. Commission-based compensation creates greater potential for conflicts of interest since it might be hard to know if the investment or product recommended by the advisor is the one that is best for you, or the one that generates greater compensation for that advisor. A fee-only structure is a better way to align your investment advisor’s interests with your own. While this type of arrangement may not eliminate all conflicts, it minimizes them.

Rule 2: Fee-only is the preferred compensation structure. In either case, however, you should insist on full disclosure of all costs including fund fees, loads and commissions, early redemption fees, transactions fees, and any markups on bond trades.

Question 3: Does the Advisor View You AND Your Investments?

Advisors fall into two categories: product-centric and client-centric. Product-centric advisors focus on the sale of specific products (e.g., insurance, variable annuities, loaded mutual funds). Client-centric advisors focus on developing an investment plan that is based on your unique financial situation as well as your financial objectives (e.g., charitable intentions).

Rule 3: The preference is for client-centric advisors.

Question 4: Will the Advisor Develop a Carefully Considered Investment Plan?

Advisors tend to one of two directions: they are transaction-oriented or goal- oriented. While the former may evaluate each transaction on an independent basis, the latter first develops a carefully considered investment plan. This plan, tailored to your unique financial situation and objectives, helps take the emotions out of decisions and can be integrated into your estate, tax, and risk management (insurance) plans. With the investment plan in place, every financial decision can be evaluated to see how it fits into the overall plan. Rule 4: The preference is for goal-oriented advisors who evaluate each decision in the context of the overall plan.

Question 5: Does the Advisor “Walk the Talk”?

There are advisors who invest their own assets based on the same set of investment principles and in the same or comparable securities that they recommend to their clients.

Rule 5: The preference is to choose an advisor who “puts her money where her mouth is.” Knowing this is the case provides an increased level of comfort and trust.

Following these rules as part of a thorough due diligence process will help you to minimize the risks of potential conflicts of interest and to identify an advisor worthy of your trust. Before making any exceptions be sure that there is a strong rationale for doing so, and that all costs have been fully disclosed and considered.

Capital Asset Management was founded in 2000 by the partners of McCauley, Nicolas & Company, LLC. CAM is a registered investment advisory firm providing investment services and solutions for high-net-worth individuals, trusts, charitable organizations, businesses and qualified retirement plans. Greg Rogers is a co-owner and principal of CAM and Ron Barnes is CAM’s president. More information on CAM’s philosophy and services is online, www.camadvisors.com.