Advisor Business Practices

Every financial advisor has business practices that impact you.

These practices will vary by advisor. We have listed some of the more important practices on this page.

You should obtain a good understanding of these business practices when you interview advisors.

Disclosure

A very important business practice is disclosure, that is, the amount of information that is voluntarily disclosed to you by financial advisors during interviews.

Some advisors volunteer information about their business practices, credentials, and ethics. Other advisors withhold this information and make you ask the right questions.

Expenses

One of the most important forms of disclosure is the amount of expense that will be deducted from your accounts.

Advisors should disclose every penny of expense, who receives the money deducted from your accounts, and what services you receive for the expense.

Advisor compensation is one form of expense that may be separate or bundled with other fees. 

Compensation

Compensation is one form of expense. It is also a key business practice that may help you select a particular advisor.

Advisors should disclose, in writing, how they are compensated (fee, commission, both), how much they are compensated, and what services you receive for the compensation.

Independence

Some advisors work for firms that produce their own investment services. For example, the advisor's firm has its own mutual fund family. These advisors may limit your investment choices to their firms' services.

Other advisors work for firms that do not have proprietary services or they do not limit your choices to those services.

You should select an advisor who does not limit your choices to his company's products. You want the freedom to select the best services without any limitations.

Reporting

Another key business practice is the type of reports you will receive from the advisor.

Advisors should disclose the type and frequency of the reports - for example, a monthly brokerage statement, a monthly performance measurement report, and a quarterly market environment report. 

Communications

Advisors should disclose how they communicate with their clients. For example, there may be a quarterly, face-to-face meeting to review recent performance and discuss the advisor's outlook for future performance. There can also be scheduled telephone and Skype calls to review your financial results.

An increasing number of virtual advisors are communicating by telephone, email, Skype, and video chat. In this case neither you or the advisor want to spend time driving to meetings. Or, you and the advisor are some distance from each other.

Custodian

Registered Investment Advisors and their representatives are not allowed to take physical possession of your assets - except their fee. This means they need a custodian to hold your assets, collect dividends and interest, and process transactions.

Most advisors use major brand name custodians, for example: Charles Schwab, Fidelity, TD Ameritrade, Pershing, or LPL. 

Be extra cautious if the advisor wants to take possession of assets or they use a custodian that is not known to you.

Book-tips

Need help finding the right financial advisor?

Read our tips.

Download your free copy!