With the recent news of the FCA’s second largest ever criminal prosecution for the £28 million investment fraud of Michael Nascumento[i], there has never been more reason to take precautions when choosing the services of an investment advisor.
The decisions an investment advisor will counsel you on could have huge ramifications on your personal and commercial finances so it is important to find the right person who understands your business, your finances and has your best interests solely in mind.
Here Daniel Terry, a Senior Financier of IntaCapital Swiss SA, Geneva, that provides bespoke solutions for complex financial situations, gives us his top five considerations when appointing a new investment advisor;
- What is their qualification and specialisation within the industry?
Due diligence when considering any new professional appointment is key. With Forbes recently estimating that at most only 25% of advisors who market financial advice and services are actually real financial experts[ii], it makes sense that your first step should be to look for a financial adviser who is a certified financial planner (CFP). This will mean they are licensed and regulated, plus take mandatory classes on different aspects of financial planning. Check online whether they are registered and if there are any online ratings based on other peoples’ experience.
It is also worth considering your objectives and looking for investment advisors with experience that matches. Make sure they outline their past experience and for examples of similar work and successes. Set out your plans and ask for their feedback.
- Are there any possible conflicts of interest?
Most advisors will work with several clients at one time; it is therefore unlikely that they won’t have some conflict of interest somewhere along the line. If an advisor claims to have none, either they haven’t thought through their processes well enough, or they’re intentionally trying to mislead you. A conflict of interest doesn’t necessarily mean you can’t work together but how the advisor handles the question determines what kind of working relationship you can expect from them. Ask them to explain how they would address their conflicts of interest and decide whether you are OK with their answer.
- How will they be paid for their work for you?
Hopefully, your shortlist of likely candidates will be made up of advisors that charge on a fee basis. Ask them to go through their fees using example transactions and try to get a clear understanding of any-costs before you begin working together. Ask them to explain their processes, for instance when the fees are expected and payment methods, invoicing etc.
Advisors typically use one or more of the following pricing models:
- Hourly fee: based on the amount of time they spend with you, typically under a Mandate or Instruction.
- Fixed/Flat Fee: based on an agreed upon flat fee.
- Assets under management fee: based on a percentage of assets they manage for you.
We would recommend finding an advisor that charges a flat fee and trying to avoid any advisors that work on a commission basis. Whilst not always true, advisors working on a commission structure might be considering their own bottom line rather than yours when advising a particular investment package.
Be sure to also identify and consider any fees that are associated with the underlying investments recommended.
- What makes the investment advice they give better than their competitors?
This question can offer an interesting insight, especially if they are able to give you a specific answer. Ask them to show other investments and then explain why they would or would not recommend them, ask to see sources they have used to influence their decisions and importantly what information they gleaned from those sources that persuaded them that their decision is the most profitable option.
Be prepared to review and check their answers yourself later.
- What tools will they provide?
Once you feel confident in your financial advisor’s background, expertise and suitability ask what, if any,tools they provide. In this digital age, investment advisors should provide online assessments and a one-stop dashboard where you can see all of your financials in one place. Online tools are a great way to provide full transparency and easy access so you can stay in-the-know and rest easy.
Some simple questions you can ask are:
- Do you provide any online tools where I can see all of my assets in one place?
- Are there online tools that you provide that can track spending and income?
- Can I do real time financial planning scenarios?
- How intuitive and easy-to-navigate are the online tools? Can you set up a demo account for me to explore?