For investors, finding the right financial advisor can be a deeply personal endeavor. More than just a money manager, advisors can take a holistic approach when working with investors. They can understand how emotion and behavioral instincts impact investors and can help them have confidence in their long-term investing strategy.
Given the high stakes of this relationship, investors looking for a new advisor should do their homework. Ronald Reagan brilliantly said, “trust, but verify.”1 When it comes to finding an advisor, we believe you should verify before you trust.
Here are six questions every investor can ask a potential advisor before trusting them with their hard-earned money.
1. How do you get paid, and what are my fees going to be?
This is a fundamental point for investors to understand before signing any advisory contract. There are several different fee structures that an advisor can use, from charging an hourly wage to taking a percentage of the assets they manage to charging specific fees for services rendered. Depending on the way they are paid, they may or may not be motivated to act in the investor’s best interest.
For example, advisors who earn commissions from selling products may be more motivated to push clients into those investments, even if it is not a prudent investing decision. That is why we believe in a fee-based system that aligns with the Fiduciary Standard. Fee-based advisors charge a set, transparent amount of money for their services to put the needs of the investor front and center.
2. Are you a fiduciary?
A fiduciary is a person or institution that follows the Fiduciary Standard, a set of legal guidelines that require them to place their client’s best interests first, be transparent about fees and conflicts of interest, and always act according to the client’s best interest. If the answer to this question is no, step away. Working with an advisor who doesn’t meet the Fiduciary Standard is a potential gamble of your family’s financial future.
3. Do you use a third-party custodian?
As an investor, finding a trustworthy advisor is vital, but is not the only safeguard you can take to protect your financial future. Some of the largest fraud, scams and schemes have come from advisors who appeared trustworthy.2 Bernie Madoff, who did not use a third-party custodian, was able to steal $50 billion dollars of people’s life savings and retirement funds.3 Prior to starting an advisory relationship, you can confirm that the advisor uses a reputable third-party custodian for custody of client assets. The custodian is entrusted to process securities transactions, collect dividend and interest payments, make distributions to investors, and produce monthly statements that document holdings and the value of invested assets. This is a critical layer of protection to help avoid being scammed; firms and advisors who use third-party custodians never actually hold the investor’s money.
If the advisory firm does not use a third-party custodian, consider that a red flag in investing and take your money elsewhere. Your financial future is too important to leave in the hands of someone who may be fraudulent or running a Ponzi scheme.
4. Can your advisor verify these four critical areas?
Third-party custody. It is critical to ask: Where is my money? Who has access to it? Financial statements should always come from a third-party independent custodian. If a statement is only coming directly from an advisor or advisory firm, consider this a red-flag.
Verify financials. Is the organization you are working with financially stable? A stable organization should be able to provide you with audited financials to understand the business activities and financial performance.
Verify returns. What are the real results of this manager? Global Investment Performance Standards (GIPS) are ethical standards for calculating and presenting investment performance based on the principles of fair representation and full disclosure.
Fines and penalties. Do you know your advisor’s history? Investors can easily check to see if the advisor has any official complaints against them; just visit the Financial Industry Regulatory Authority’s (FINRA) website.
5. How do you communicate with and coach clients?
Advisors can be advocates for their clients, regardless of what’s going on in the market.
A powerful advisor remains calm and can coach you to make investment decisions based upon your true purpose for money. Despite market volatility, advisors can be a stand for their clients, helping to break down the unconscious biases of investing that can drive your decision-making and potentially cause you more fear or stress.
It’s also important to ask how a potential advisor will communicate and at what intervals. Will they be sending you emails? Texts? Calling you on the phone? Asking you to meet in the office face-to-face? Depending on your communication style, you may prefer an advisor who commits to meeting in person once a quarter, or you may prefer regular phone calls or virtual meetings. Whatever your preferences, you can find an advisor who is accessible when you have questions and prioritizes communication.
6. What is your investment philosophy?
Every advisor has a different approach to investing. Some pride themselves on stock picking or selecting the best portfolio managers, which, we believe, is essentially speculating and gambling with your money.
When looking for an advisor, consider their investing strategy. Is it based on empirically tested Nobel Prize-winning research? When Mark Matson founded Matson Money three decades ago, he was determined to offer an investment methodology based on academic research and empowering investors to not speculate and gamble with their money.
Many investment advisors sometimes get stuck in a trap (or several) chasing “hot” stocks, trendy tips or new products – passing along to clients that this is the next “sure” thing. During this process, they are potentially speculating and gambling with their client’s money, trying to pick the “winners,” potentially creating more commissions for themselves. At Matson Money, advisors do not depend on guesses or predictions to help fulfill on their clients’ financial dreams but rely on coaching and the steadfast application of empirically tested academic investing principles. Through this method, clients are coached through the process of discovering their true purpose for money – what really matters to them, what they hope to achieve, and what they want their future to look like. This can create an opportunity for long-term peace of mind around investing, their money and their American Dream.
Interested in learning more about investing reimagined, click here.
1. Armstrong, Frank. Trust But Verify. Forbes. October 21, 2019. Retrieved 26 July 2022 from https://www.forbes.com/sites/frankarmstrong/2019/10/21/trust-but-verify/?sh=8d656f358734.
2. Don’t Fall for an Investment Scam – Investor Alert. U.S. Securities and Exchange Commission. 10 October 2019. Retrieved 27 July 2022 from https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_dontfallscam.
3. Lenzo, Robert. Bernie Madoff’s $50 Billion Ponzi Scheme. Forbes. December 12, 2008. Retrieved 25 July 2022 from https://www.forbes.com/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html?sh=1ec3caaa650b
This content is based on the views of Matson Money, Inc. This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.
This content includes the opinions, beliefs, or viewpoints of Matson Money and its Co-Advisors. All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors. Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.
Other financial organizations may analyze investments and take a different approach to investing than that of Matson Money. All investing involves risks and costs. No investment strategy (including asset allocation and diversification strategies) can ensure peace of mind, guarantee profit, or protect against loss.