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Some investors without a background in finance might seek out professional assistance when it comes to investing. This is reasonable, as the capital markets are full of minefields that require careful navigation.
For other investors, the need for investment advice from a qualified financial advisermight arise with a certain amount of investable assets.
Relationships with financial advisers are not without complication, though, and investors should carefully examine a professional's qualifications, as well as other issues.
Issues with financial advisers range from hidden referral agreements to the appropriateness of specific investment recommendations, both of which can negatively impact the investor's portfolio.
Investors should particularly consider the following three areas that have the potential to adversely affect both the relationship with the financial adviser and the return performance.
1. Referral agreements
This is a tricky subject, but one that can be navigated with proper disclosure.
Financial advisers should generally receive a flat fee for their investment guidance. However, some might recommend certain investment products for which they receive kickbacks or sale commissions.
A hidden referral agreement, of course, is a serious breach of trust. Such relationships must be disclosed in order for the investor to get a proper picture about the underlying incentive structures that influence the adviser to make certain investment recommendations.
2. Asset allocation
Every serious financial adviser will never suggest that clients invest a considerable amount of funds in any particular security, whether it's a stock or a bond.
Using all kinds of asset classes in building a portfolio is a prudent investment approach that takes advantage of the concept of diversification.
Diversified portfolios exhibit much higher resilience in times of erratic market behavior. The recommendation to construct a diversified portfolio is a sign that your financial advisor takes seriously his or her task of providing value-adding service.
3. Competence
Topping the list of things investors should grill their advisers about is their educational background.
The higher the qualification and educational achievements of the financial adviser, the better. Look for investment-related credentials such as certified financial planner or chartered financial analyst, which signal a solid understanding of both capital markets and portfolio construction.
Both qualifications ensure that the person talking about your financial future really understands the matter at hand.
The Foolish takeaway
The adviser-client relationship can be complex. However, the issues can be resolved by insisting on proper disclosure.
If no disclosure is made, investors should raise the subject with the financial adviser directly in order to make sure that you, the client, receive the best, unbiased investment advice possible.
