Know What Kind of Advisor You Hire

Beyond designations, there's real differences to consider.

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David B. Armstrong

While some investors are successful “do-it-yourselfers”, there are plenty who choose to hire a professional. Choosing the right professional is difficult and goes well beyond researching their background, experience, and regulatory history. In fact, the degree of difficulty is compounded by the lack of consistency regarding the titles that financial professionals use. It is not uncommon to see titles like financial advisor, private wealth advisor, wealth management advisor, private wealth specialist, private banker and even stock broker used in a weak effort to brand or differentiate services between firms and individuals.

For the purposes of this column, I’ll just stick with the generic term “advisor” and in the interest of full disclosure, I want to point out that I am an advisor myself, so I know firsthand that a title cannot be used to effectively differentiate professional services since the popular titles above are ubiquitous and unstandardized across the industry.

This is unfortunate.

It gets even harder when investors start to consider whether a professional works for a broker dealer, where they are mainly subject to “suit ability rules” or they are affiliated with a Registered Investment Advisor (RIA) and subjected to “clients’ best interest” rules.


But let’s assume that an investor has done their due diligence, completely understands the title being used and recognizes the distinction between a broker dealer and an RIA. Is that all an investor needs to know?

Regrettably, there is even more to know because the investor must understand what kind of advisor they have selected, which I think can be broken down into three classifications: the “old school” advisor, the “new school” advisor and the advisor who is a portfolio manager. The downside of each is important.

The Old School Advisor

My opinion is that this is a dying part of the profession. The “old school” is captive to the research published by their firm for ideas and the associated transactions. They charge commissions and make money when both buying and selling securities. Portfolios are inconsistent across client accounts and their research ideas are probably limited by recommendations from the compliance department of their firm. It’s common to restrict advisors from soliciting (calling and selling) clients to buy an equity security that is not covered by the firm’s research department. I think it’s next to impossible to achieve a globally diversified portfolio under this model since client accounts look more like a collection of securities rather than a portfolio that follows a strategy.

The New School Advisor

This seems to be the most popular (and populated) type of advisor in the industry right now. Many advisors are generally taught to follow the tenants of Modern Portfolio Theory, gather assets create an asset allocation for clients using MPT. Then, they outsource the management of each different asset class to third-party asset managers. It’s easy to teach, grounded in academics and financial theory and profitable for the firms employing this type of advisor. One big problem is that the doctrine of MPT has not held up very well over the past ten years and those clinging to MPT (including the actual advisor firms themselves) seem reluctant to adjust to the fact that some major shifts have taken place in the global investing landscape. Additionally, MPT is not much of a differentiator in the industry if most advisors use it — especially since it has not been doing well for ten years. On top of that, internet-based firms are delivering optimal portfolio mixes based on MPT for interested clients for around 0.25 percent a year, so competition is heating up.

Another well-established problem is that past performance does not ensure future performance – we have all read those disclosure words. So if MPT and asset allocation plans are similar, the skill becomes picking the best third-party asset managers. The question is, can they? My opinion is that any claim of being able to pick the best money managers across all different asset classes is misleading because identifying the best (past tense) does not mean they will continue to be the best. There is a lot of research and statistics that can be used to justify the selection of managers, but in the end, it’s anyone’s guess if they will be the best next year. On the other hand, there is plenty of research showing the opposite, including statistics like the fact that 80 percent of large-cap managers fail to outperform their benchmark indexes. Those are bad odds no matter how smart an advisor is or how much they believe in their system of picking “best of breed” managers.

The Advisor as a Portfolio Manager

This seems to be the direction most of the serious advisors in the industry are headed. Under this model, the advisor is also the portfolio manager. They receive permission from the clients to act with discretion which allows the advisor to buy and sell securities across all clients without having to consult each client individually, much as a portfolio manager of a mutual fund does. If the advisor believes that selling security X and buying security Y make the best sense, they do it for every client at once. There are several limitations for investors choosing to use this type of advisor. First, they are in small numbers among broker dealers, though this is starting to change. Most are RIAs, of which there are far fewer.. Second, clients are putting a great deal of trust in their advisor, since he or she will be acting alone as the portfolio manager. Turning over all decision making to someone is a serious choice.

How To Choose?

There is no clear cut answer on this and it’s really more of a judgment call based on trust and confidence. There is no right or wrong advisor to choose, but each should clearly outine benefits and risks of working with them or their team.. However, armed with some of the downsides associated with each, an investor can now more accurately assess if any of these three advisor types have responses that satisfy the question.

David B. Armstrong, CFA, is a Managing Director and Co-founder of Monument Wealth Management, a Registered Investment Advisory firm located just outside Washington, D.C. in Alexandria, VA. David is routinely featured in national media sources and has been a speaker at several major industry conferences including Barron’s Winner’s Circle, IMCA, InsideETFs, LPL Financial Business Leaders Forums and Focus conferences. Follow David on and the rest of Monument Wealth Management on Facebook, Twitter, LinkedIn, YouTube, and on his “Off the Wall” blog which can be found on his website.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance referenced is historical and is not guarantee of future results. All indices are unmanaged and may not be invested into directly.