Finding an Advisor - Don'ts and Dos

I believe that Vestory is one of the best investment management firms in the business. I wouldn’t be doing this if I didn’t.  For that reason, I tend to make it sound as if there are no other advisors worthy of your business. My disdain for the majority of “advisors,” brokers, insurance agents who sell “investments, and their ilk is often mistaken for a blanket condemnation of the entire investment industry. For leaving that impression, I apologize.

There are several great purveyors of investment advice. They just end up being overshadowed and outspent by the less principled members of the financial fraternity. I would guess that, for every ethical money manager, there are dozens (if not hundreds) less than honorable product peddlers and system sellers.

Given the overwhelming odds against finding an honorable investment advisor, what should someone needing help building a better future do? How do find someone to help manage your future fuel, money?

When the choices seem overwhelming, I find the process of elimination to be more efficient. As the old Johnny Mercer song goes “Eliminate the negative.” Therefore let’s starts with the “Don’t” list:


Don’t invest with insurance agents. I state this as an absolute because the insurance industry has effectively managed to avoid federal regulation. Instead insurance companies operate in a morass of state regulatory confusion that allows most agents to operate relatively free of oversight. In most states, there is no clear fiduciary duty to clients and clear fee and risk disclosure is not required. Because of this lack of oversight, fees on insurance based investments can be astronomical. According to a New York Times article (9/15/11), “The average bare-bones variable annuity has fees totaling 2.5 percentage points a year…” In addition, most investment products from the insurance industry are bewilderingly complicated (for good reason, too, if you understood them you would never buy them).

Don’t ever pay a commission. Whatever you pay in an up-front commission or “load” reduces the amount of money placed in your chosen investments. Don’t just ask about loads, read the prospectus. Brokers have been known to lie. Take, for example, the infamous “sales load in drag1” funds created by the brokerage industry in the mid-1980s. To combat the increasing popularity of no-load funds and conceal commissions, firms starting offering no front load funds that, instead, charged the load in hidden, bite-sized segments through the use of SEC sanctioned 12b-1 fees added to the regular fund operating expenses.

The brokerage industry would like you to believe that these “load funds in drag” are actually true no-load funds. Radio host, Dave Ramsey (who relies on commissioned brokers for a large part of his livelihood), is guilty of confusing front-loaded mutual funds with “stealth loaded” funds when he implies that “Even with the commission, the loaded fund is less expensive… 2” by using a no-load fund example that looks more like a broker sold “B” or “C” share.

Let’s take a look at a fairer comparison using Kiplinger’s February 2014 “Top Performing Mutual Funds” list. I’ll use the top-ten large company stock funds to select the loaded and non-loaded fund with the lowest expense ratio (and a 10-year track record), then, just for fun, I’ll throw in the “stealth-load” version of the Morgan Stanley loaded fund:


As you can see, Dave’s advice on front-load funds makes sense only when you insert a “stealth-load” or another expensive fund in place of a true low-cost, no-load fund (of which there are many). As an added bit of evidence that no-load funds aren’t typically more expensive than load funds, the two no-load funds in Kiplinger’s list were cheaper than any of the loaded funds.

Removing the commissioned insurance agents and commissioned brokers from your search pares the list of possible investment advisors from hundreds of thousands to merely thousands. Now you can start start to apply a few screens to this more manageable lot.


Do use a fee-only advisor. Since you aren’t going to be paying a load (sales commission) your advisor has to be compensated another way. This is best done by paying a clearly stated and easily understood fee (typically a percentage of assets managed or an hourly charge).

Do keep fees low. All else being equal, the less you pay, the more you make. The typical investment advisory fee runs around 1% of assets under management per year. This is on top of any mutual fund internal expenses and/or transaction costs. There are many well known advisors with annual fees starting at 2% or more. That's just too much!

Do seek out science. Be sure your advisor has a scientific basis for making portfolio decisions. Avoid anyone who uses the word “feel” or “time” in a description of their portfolio selection process (“when we feel the market is overvalued we…” or “we try to choose the best time to buy…”). Ask to see the research upon which their investment and allocation decisions are made. Be sure that it comes from respected, reputable sources and has withstood peer scrutiny.

Do use a fiduciary. Doesn’t it seem reasonable to have someone managing your money who is required by law to look out for your best interest? It’s called acting as a fiduciary. Doctors, lawyers, and CPAs are all required to act in their clients best interests. You would think that those who provide investing help would also have a fiduciary obligation to the client. You would think it, but you would be wrong.

Most of the financial services industry does not operate under a client fiduciary standard. Most commissioned brokers actually have a contrary fiduciary standard; they must work for the best interests of their firm. They are only legally required to avoid selling you an “unsuitable” investment product.

Registered Investment Advisors operate under a client based fiduciary requirement. This doesn’t mean they will always for it. None of us are allowed to rob a bank, but some still do. Fiduciary responsibility only means that you have recourse should an advisor not do the proper research or suggest an investment that wasn’t the best choice available to you.
Make sure it all makes sense. If you don’t feel that you have a decent understanding of the advisor's process, services, and fees cross them off your list. Investing is not (and should not be) particularly complicated. It is based on a few simple rules and basic concepts that have been condensed to four words by Nobel Prize winning economist, William Sharpe of Stanford, “Diversify… keep costs low 3"

1 SEC Chairman, Christopher Cox “Address to Mutual Fund Directors Forum” - April 13, 2007
2 Dave Ramsey’s Blog -
3 Willaim Sharpe - Sensible Investing -