Reviewed January 2000
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An investment adviser can play a large role in helping you design and implement an investment plan. Whether you decide to work with an adviser or not will probably depend on:
Before starting your search for a competent investment adviser, it's important to:
Assemble facts in advance about your financial situation. The more prepared you are, the better and less costly the help of an adviser may be.
Investment advisers may include:
Other professionals may also provide helpful information and services in relation to investments, such as:
Some advisers may fit several of these roles (for example, a financial planner who is also a stockbroker).
Check telephone directories to see what financial services are available in your area. Talk to friends, relatives, professional groups you are involved with, and others whose advice you trust. (Remember, however, that the investment adviser should meet your needs, not those of others.)
If the adviser or the adviser's firm is registered or licensed by a state agency that requires compliance with education and ethics requirements, then you will have some recourse through regulatory actions in the unlikely event that your adviser violates ethics regulations.
Be prepared to pay for the investment advice you receive. Some advisers work for a fee only, some work on commission, and others combine commissions and fees.
An adviser who either sells a variety of investments or offers only advice may be preferable. When investment advisers' incomes depend on sales, their advice may be slanted toward the products or services sold by the firm they represent -- which may or may not be the best choice for you -- and for which they earn a commission. This potential bias is of special concern when financial advisers handle only a few types of investment alternatives.
Before making a commitment to an investment adviser, decide if the time and money costs are justified. Be sure to agree on the fees in advance. Know what you are paying for. More important than your adviser's compensation is his or her competency.
It is important for you to develop some basic knowledge in personal finance and investments. Then you can better decide whether the financial advice given by the adviser coincides with your financial and personal situation and is in your best interest.
Generally, if someone receives compensation for providing specific advice involving securities, they must either be a registered investment adviser (RIA) or a registered representative (stockbroker). Some other professionals may not be defined as "investment advisers" under securities laws (for purposes of registration) if their advice is incidental to the practice of their profession.
In Missouri, the RIA designation means the individual has passed at least one examination and has had an application for registration approved by the Missouri Securities Division.
Registered representatives must be licensed through the National Association of Securities Dealers (NASD), a self-regulatory organization whose operations are overseen by the SEC, and registered with each state in which they conduct business.
The registered representative is the link between the investor and the traders and dealers who actually buy and sell securities on the floor of the stock exchanges and elsewhere. Registered representatives must pass a variety of securities examinations, depending upon the type of securities sold.
Full-service brokerage firms offer investment advice and ideas and may have research departments that provide reports and other services to assist in evaluating investment alternatives. They may also be willing to work with investors in arranging their portfolio to reach investment goals.
Stockbrokers generally charge a commission based on the value of the trades they make, although a few charge a flat rate (regardless of the amount of shares purchased), an annual fee based on the value of securities purchased or other methods.
When fees are based on transactions, the larger, more active accounts often receive the most attention from a full-service broker. However, good stockbrokers will want to develop future business, so you may get more service if you are building a steady, long-term investment program. Inexperienced investors who feel they need advice may want to stick with a full-service broker.
One alternative to working with a full-service broker is to subscribe to an investment advisory newsletter or service and then place your order with a discount stockbroker (or in some cases, go directly to the source, such as purchasing mutual funds directly).
Discount brokers are useful when you already know what investment you want to make. They often offer similar types of financial products. However, they offer little or no investment advice or help in examining investment strategies and alternatives.
Some discount brokerage firms, especially larger ones, may provide reports and other information services that investors can use to evaluate investment alternatives. As their name implies, commissions may be 30 percent to 70 percent less than those of full-service brokers. However, there are usually minimum fees, which may make small transactions similar in cost to those of full-service brokers.
The Missouri Securities Division, a part of the Office of the Missouri Secretary of State, and the SEC require both registered investment advisers and registered representatives to provide prospective clients with certain information about the firm, including, among other disclosures, a statement of the firm's fees and services.
Registration information, including qualifications and background of RIAs and registered representatives, is available as public information from the Missouri Securities Division in the Office of the Missouri Secretary of State. You can contact the Investor Hotline at 800-721-7996 to determine if an individual has the appropriate registration. However, you cannot obtain information about the performance of registered investment advisers or registered representatives from these regulatory agencies unless there have been specific complaints of alleged misconduct. Nor will these agencies pass judgment on the worth of securities offered for sale. Investors should judge the worth of securities based on their evaluation of all information and advice received.
The starting point for beginning investors who want to learn more about financial alternatives is often an officer in a bank, savings and loan association or credit union. While services differ across the state, all financial institutions can help you select savings alternatives for some of your emergency fund and short-term goals fund. There are generally no fees for purchasing these savings-type products.
Where investment advice is part of their normal duties, financial institution representatives are not required to be registered with the Missouri Securities Division or the SEC. However, if the institutions have subsidiaries or affiliates involved in securities sales, then passing securities examinations and licensing by the NASD and the Missouri Securities Division are required.
Some banks are authorized to manage trust funds, for which they charge a fee (such as a percentage of the trust principal). Bank trust departments are usually conservative investors.
During your search for an investment adviser, you may meet some financial planners. They take a broad view of your financial situation and design an overall strategy to help you meet your financial goals. This necessitates a broader look at your entire financial situation: current cash flow, spending plan, net worth, savings, investments, taxes, insurance and retirement and estate arrangements.
Some financial planners not only provide investment advice, but also sell various financial products (including investment products). They also offer advice on insurance coverage, tax planning, retirement planning and estate planning. Financial planners may work for a flat fee, for a commission, or for a combination of both. Those who work on commission make most or all of their income from the sale of investments and other financial products. Financial planners who receive compensation for investment advice must register with the Missouri Securities Division and the SEC. Those who are involved in securities sales must pass securities examinations and be licensed by the NASD and the Missouri Securities Division.
"Fee-only" financial planners may be more expensive, but they have less to gain by selling you certain products. Their fees may be based on an hourly charge, a specific charge associated with a specific service or a percentage of a client's assets or income. Be aware that while fee-only planners do not sell financial products (and charge commissions), there may be some type of fee charged by whoever handles the actual purchase or sale of the investment the planner recommends.
Except for licensed professionals and RIAs, there is little regulation in the financial planning industry. Unfortunately, not all people who call themselves financial planners are qualified, so it is important to carefully evaluate a financial planner's education, certification and experience.
Insurance agents serve as advisers to families about risk management and often offer a few investment products. Independent insurance agents can select one company from several that fit your needs. An exclusive agent represents one company and is limited by what that company offers.
Before consulting with an insurance agent, make sure the agent and the affiliated company are licensed by the Missouri Department of Insurance. Agents and insurance companies who violate unfair trade practice rules may be subject to suspension or revocation of their licenses or financial penalties.
Insurance agents who receive compensation for investment advice or sales of securities must also be licensed by the Missouri Securities Division and the NASD. This additional licensing is not required if advice or sales are limited to fixed-rate annuities issued by insurance companies.
Insurance agents make most or all of their income from commissions on the sale of insurance and other investment products.
Another possible source of advice is an accountant. Be aware that uncertified public accountants (PAs) are not licensed or regulated. There are no specific requirements or an enforceable code of ethics for PAs.
Certified public accountants (CPAs) must become certified and licensed to practice. They obtain extensive education and experience in accounting, auditing, economics, finance, management, taxes and consulting services in relation to various types of business and personal financial matters.
In Missouri, CPAs are licensed and regulated by the Missouri State Board of Accountancy and are subject to the laws and regulations administered by the Board. They must also follow a stringent code of ethics.
Accountants generally do not hold themselves out to be investment advisers, but they can often provide information or analyses of various types of investments. They can also help you evaluate the possible effects of investment alternatives on your overall financial condition, income taxes and future estate taxes.
Usually, accountants will provide relatively generic advice or investment information (rather than recommending particular investments). However, accountants who do provide investment advice and receive compensation solely related to that advice are required to register with the Missouri Securities Division and the SEC.
Most accountants (except those who are also RIAs or registered representatives) charge only for their time or a set amount for a given service. Accountants who are RIAs or registered representatives are more likely to charge commissions or referral fees.
Attorneys can offer advice about the legal and tax implications of your investments, but they generally cannot advise you on which investments to make. Like accountants, attorneys who provide investment advice and who receive compensation solely related to that advice are required to register with the Missouri Securities Division and the SEC.
An attorney may be important when considering certain investments, but generally not as your primary investment adviser. They are the only professionals who can provide legal advice, resolve legal and property transfer problems and prepare legal documents.
In Missouri, attorneys are licensed and regulated by the Missouri Supreme Court. They are subject to rules enacted by the Supreme Court, including a strict code of ethics provided for in the Code of Professional Responsibility and the Rules of Professional Conduct as adopted by the American Bar Association. Violation of these rules may result in either an informal admonition, public censure of the attorney, suspension of the attorney's license or permanent disbarment from the practice of law.
Attorneys may charge a flat fee for a particular service, an hourly rate or a combination of the two. Attorney fees are high, so you will want to have specific questions ready to ask before consulting with them. However, it may be more costly in the long run if you do not consult an attorney in relation to complex matters like estate planning.
Many people use a team of investment and other financial advisers. This team might include a registered investment adviser or stockbroker, a financial planner, a banker, an attorney, an insurance agent, an accountant or other professionals who can advise you on investments, estate planning, retirement planning, risk management, taxes and other financial matters. You may want to rely on one of these professionals as a "team captain."
Finding the advisers whose talents and resources fit your needs will require an investment of your time and effort. However, it is an investment that can pay dividends.
Investment newsletters are a source of investment advice. There are many investment newsletters on the market, as well as computer and other information services, that deal with selection and timing of various investments. There are even newsletter rating services that can help you decide which newsletter is best for you.
Check your local library or the business library of a nearby college or university to get a listing of investor newsletters and rating services. A less expensive way to get some basic investment advice is through magazines such as Business Weekly, Forbes, Fortune, Kiplinger's Personal Finance Magazine, Money, Smart Money and Financial Planning.
Remember, some investment advisers primarily handle investment purchases and sales. Others are consultants. They offer information and advice. Some advisers will manage your investments and act on your behalf. Others are somewhere in the middle, providing information when you ask and letting you know of good investment opportunities.
Before interviewing potential investment advisers, it is very important that you think carefully about what type of advice, information, and services you want and need. Once you've identified potential investment advisers:
If the adviser is licensed for certain services, you may want to contact the Missouri agency that issues the license for further background information (especially about disciplinary actions). Remember these key facts about interviews:
When working with professionals to design and implement an investment plan, be aware that they are advisers. Reaching your financial goals is like a road map. Often there is more than one route to take. Every individual or family is in a unique financial position -- and any course of action must also be unique.
Financial advisers can provide guidance, but you must choose the route you want to take. Remember, it is your money. The decisions rest with you.
For that reason, it's important that you be knowledgeable about your goals and your personal and financial situation. Further, you need to be knowledgeable enough about investment alternatives to ask the right questions -- and perhaps even more important, understand the answers and implications of various decisions. Ask questions and insist on understanding the plan and its implications.
Don't expect your investment adviser to always be right. They are only human. It is more important that they be honest, knowledgeable, straightforward and provide good service. Further, they need to understand your investment goals and work for and with you.
GH3525, reviewed January 2000