There are thousands of advisory firms in existence and hundreds of thousands of individual advisors. It can be incredibly difficult for consumers to differentiate between the types of firms and advisors. At MFA, we place a high value of education and often encourage prospective clients to take their time educating themselves and comparing firms before deciding to work with one. Below are five questions that we believe are relevant and helpful in quickly filtering and sorting prospective firms:
Is the firm a Registered Investment Adviser? Is it affiliated with a broker-dealer or insurance company?
Registered Investment Advisers are legally required to act as fiduciaries and put client interests ahead of their own.
Broker-dealers, insurance companies, and their personnel are not required to act as fiduciaries. They are typically held to a "suitability standard," which means that they can recommend anything that is "suitable" even if it is not the best thing for a client. We should note that some individual brokers and insurance agents are required to act as fiduciaries (even if their employer is not), but we prefer to see both firms and individuals held to a fiduciary standard in order to limit conflicts of interest.
What fees and expenses will I pay? How is the firm paid?
Knowing a firm's fees is important. Understanding any other costs and expenses is also very important. Additionally, it is helpful to understand how an adviser is paid and what conflicts of interest exist. Are fees received directly from clients or is there some other arrangement? Fees paid to a third-party who then remit a portion to the adviser or a commission arrangement are common yellow flags that could represent a conflict of interest.
For those looking for financial planning: Do you offer financial planning as a standalone service? Will you do planning for me if you do not manage my assets?
Is financial planning a core competency supported by dedicated resources or is it an incidental service tacked on to an investment management business?
Can you provide references?
The Securities and Exchange Commission (SEC) prohibits Registered Investment Advisers from publishing testimonials, so prospective clients must ask for references if they want to hear from other clients. Asking for references of service providers (such as accountants and attorneys) that work with the adviser may also be helpful.
How is your money invested?
We believe it is important for advisers to have "skin in the game" and to "eat their own cooking" by investing their own money in the same strategies that client money is invested in. Obviously, there will be differences due to risk tolerance, liquidity needs, and so on, but it is important to ask how an adviser's own money is invested.
Both firms and individuals are required to register themselves with the SEC, who maintains the Investment Adviser Public Disclosure website. We encourage investors to use the website to both learn about prospective advisory firms and personnel, as well as uncover any disciplinary or legal history.