With the House and Senate banging out the final version of the financial reform bill, it seems a fair guess that many people are wondering how the new law will affect their own investments, and that trustees are likewise concerned about what major consequences such sweeping legislation might have on the assets they are obligated to carefully manage. While a significant part of the bill is still up in the air, all possibilities seems to point to one answer:
None. Nada. Zilch.
Both the House and Senate versions create an oversight board for Wall Street to reel in the overly convoluted securities that helped trigger the recession, and to force the big firms to create a rainy day fund lest they need to bail themselves out. Separately they dabble in executive compensation and credit card charge reform. Ultimately, it keeps the investment firms a little less profitable and a little more stable, and fees may rise a little to compensate, but if you’re not loaded up on mortgage-backed derivatives and you’re happy with the financial advisers you have, you shouldn’t see much difference.
That being said, plenty of people are fed up with their portfolios, their brokers, or the purportedly evil companies they work for. Bank of America and Wells Fargo are the proud new owners of Merrill Lynch and Wachovia, respectively, so you might be wanting to consolidate banking and investing, or maybe you want to cut out those brokers to spite their parent banks. Whatever your reason, changing investments and investors requires a little bit of leg work. With your own money this is simply smart, but as a trustee, it’s a legal and fiduciary obligation. Follow these five rules, though, and doing your due diligence will be a cakewalk.
1. Decide What You Need.
If you’ve got a strong background in finance, or if your trust has a single beneficiary which requires some straightforward investing, you may elect to have an inexpensive online brokerage account to seek help where you need it. If you want someone who will give you a little initial advice and who you’ll be able to check in with from time to time, some brokers will do that at a reduced fee. However, if, like most friends-and-family trustees, you aren’t well versed in the art of investment, or the trust will have significant ongoing investment activity, a full-service/full-commission broker will be necessary and invaluable. Such a broker, often called a financial adviser or financial planner, is a valuable partner who will be able to offer detailed advice and help to craft a comprehensive plan for trust assets. In some cases, a trustee may even delegate investment changes to a paid financial planner, provided s/he keeps tabs on the broker and his/her performance. The more you will be relying on the broker you choose, the more important it becomes to vett your choices thoroughly.
2. Ask Around.
Your attorney, accountant, or banker may all be able to recommend a reputable professional in your area who will provide the type of services you’re looking for. Depending on how much they’ve collaborated in the past, your contact may have a great deal of knowledge about the person’s performance and skill, or just a simple friendship. If you don’t have relationships with such professionals in the know, asking friends and searching ratings sites like Angie’s List will still give you a better start than the yellow pages. No matter who you find or how you find them, that’s only the first part of the inquiry. Either way, that’s only the beginning of the inquiry.
3. Interview Potential Brokers.
While recommendations are nice, you won’t know until you have met with a potential broker if they are personable, attentive, and willing to perform the type of work you need. Chemistry can be important. Some people want someone who takes the time to explain the markets and how their suggestions work in detail, while others want someone who will give them the information they need to know without wasting their time. You can’t tell if someone will be a good fir in that way until you get to know them.
At the actual meeting, there are a few things you should always ask for. Any broker should be willing to freely provide their résumé and a list of references who are in a similar position to you. Picking someone with significant experience and whose own customers indicate that s/he will be a good fit is an important start, and if you can’t get the information you need to do that, you should take it as a red flag.
4. Price Shop.
You should also ask potential brokers to detail their firm’s commission and fee structure, and shop around a little to see if you would be paying too much for too little. Be sure to factor in administrative fees, as they can add up quickly, and if you anticipate a low-activity portfolio high monthly charges may seem excessive. Strive for a reasonable balance. Also, ask whether they receive heightened commissions or bonuses for selling in-house financial products, and keep the answer in mind for when you two are deciding what investments to make.
5. Look Them Up.
Researching potential brokers was once a complicated task, but with the internet a few minutes and a handful of keystrokes is all it takes to get the information you need. FINRA, the non-governmental body that licenses brokers, will give you detailed information about any potential broker, including education, work history, certifications and examinations, and complaints. You should look for brokers who have no complaints on file and whose licensure history matches their resumes. If you can’t find the information online, you can ask the broker for his or her U-4 Statement, which contains the same information. Additionally, brokers are often also certified financial planners, or CFPs, a professional designation that requires certain experience, education, and additional examination beyond a general broker. CFPs are certified by the CFP Board of Standards, whose website can help you locate a CFP broker and will also list any history of complaints.
It’s that simple. When you find someone who you think you will work well with, who will give you the level of attention you need at an appropriate price, and whose vetting checks out, you have a solid choice for a new broker.