How to pick an investment advisor

The role of investment advisors

Investment Advisors – often called Financial Advisors – play in an important role in helping individuals manage their assets and plan for the future, whether that be the education of their children, retirement, or something as personalized as accumulating the funds necessary to start a business.

The first step for any investment advisor is to obtain a thorough understanding of your personal financial situation, which includes everything from your current and future income situation, to your insurance needs, to the possibility of inheriting funds. He or she will also speak to you about your risk tolerance, which is critical to putting together an investment plan that meets both your financial goals, and your willingness to tolerate more aggressive investments.

There is a range of professional training and accrediting that Investment Advisor must meet, and anyone thinking about engaging one should do some homework about these different levels. The distinctions between types of Advisors are often based on the products they are licensed to sell. For example, an Advisor who sells insurance must pass a series of exams in order to earn their license. And even within the world of insurance, there are different levels of expertise; for example, a CLU – or Chartered Life Underwriter – is the highest distinction that can be achieved.

Even though Investment Advisors are supposed to be neutral in their approach to your planning, there are some who believe that someone who comes from an insurance background is more likely to use that as a financial tool, and someone with an investing orientation is more inclined to use investing instruments rather than insurance to achieve the same goal.

So it’s important to consider the totality of a Financial Advisor’s experience and background before making a decision about engaging one. Of course, fee structures are important as well; there are different kinds of relationships, and there are pros and cons associated with each.

Some Financial Advisors work on a commission-only structure. They earn their fees from transactions, whether that be a stock trade or the purchase of insurance. Many believe that these relationships lead to a conflict of interest, because the Financial Advisor is encouraged to make trades or engage in transactions solely to generate income.

Some are fee-only, which is just what it sounds like. That can be an hourly fee, a percentage of assets under management, or another structure. Finally, some Financial Advisors work on “fee-based model,” which is a combination of fee and commission.

The Internet is creating new platforms for investors to find financial advice, just as it is creating new opportunities in other areas. Some of these innovations go beyond the conventional Financial Advisor structure. One example of that is a company called Covestor, which can be found at This firm makes a collection of expert money managers from around the world available in a single place. Potential investors can find a manager who is best suited to meet their financial goals, based on investment strategy and risk tolerance.

With the Covestor platform, an investor can look into a money manager’s entire track record; interestingly, traditional Financial Advisors rarely if ever provide a client with that access. Once an investor finds a manager they like, an account is established and the investor’s portfolios is “synched” to the managers so it mirrors each trade.

Whatever decision an investor makes, it is important to fully understand the implications, the costs, and ability to end the relationship without cost or complexity.

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