In our last blog we railed about how everyone calls themselves an ‘investment adviser’ – but many are not. Here is our handy guide to all the folks out there and what they really do.
Broker: Sells product. Paid by commission. Has an incentive to make changes in order to get paid, or at least to sell you in-house mutual funds, annuities, insurance policies with long term, ‘trailing’ commissions where he gets paid for several years after you buy. BEWARE: the broker can turn into a ‘financial adviser’ while sitting at the same desk, and ALSO charge you management fees. Sometimes this will happen if the broker asks to split your account. On one, he takes commissions; on the other, he takes fees. Defense: ask exactly how much you will pay per year, in dollars, if you invest a certain amount of money with the broker. Ask for his performance record.
Financial Planner: No offense to these folks, but many are jack of all trades and master of none. They often charge fees AND commissions. They budget or create a plan for you using a software program purchased from a vendor. Review the plan carefully; I have seen errors like inflation escalators on mortgage payments that are fixed, and totally unrealistic investment return patterns that culminate in showing you that you will be worth six million dollars in twenty years when you start with $500,000. Financial planners may also help you with your insurance needs (read: sell you expensive insurance policies), estate planning and taxes. They are eager to manage your money. Defense: Ask how much you will be charged. Ask what is the underlying theory behind the practice: is the firm aggressive, or conservative? Be sure you understand how the fat book you will receive with fields of numbers and charts relates to YOU. Look for credentials and career persistence in the field of specialty. We generally believe it is better to get tax advice from a CPA, estate planning advice from an estate planning attorney, and investment advice from a professional money manager, because you are then tapping into specific expertise for every facet of your requirements.
Registered Investment Adviser (RIA): This refers only to the requirement that the firm register either in the state where it practices or with the Securities & Exchange Commission. It communicates very little information about what kind of firm or person you are dealing with.
Portfolio Manager: Cascade’s professional staff are all portfolio managers. Like other portfolio managers, we spend 100% of our time determining what clients need to earn to meet their goals, and researching solutions in the form of securities purchases and sales to achieve those goals at an appropriate level of risk. Paid by fee only. “Fee only” generally aligns client interest with the manager’s interest, in that if the asset base does what it is supposed to do, you stay with the manager, and he keeps getting paid. Defense: understand the investment philosophy and why it is supposed to work. Ask how it works in good markets and bad.
Aside from these typical adviser types, you will encounter CPAs, lawyers, and all sorts of other practitioners who want to manage your money. Again, find out how much you will pay, research credentials, and ask for past performance in all market cycles for the type of account you have.