Do Your Homework

Investing has never been so complicated. Strategies and tools have emerged to capture opportunities in markets such as foreign, currency, commodity and housing. The use of complicated investments such as derivatives, options, contracts, mortgage and collateral-backed securities is now widespread - and often unsuitable for the average investor.

Broker-Dealers:

A broker buys and sells securities and products such as stocks, bonds, and mutual funds. There are basically two types: discount and full-service brokerages. The differences are levels of service (i.e. consulting/monitoring) and compensation.

Brokerages are heavily regulated by the Securities and Exchange Commission (SEC), making it relatively easy to conduct a background check. Check with the Financial Industry Regulatory Authority (FINRA) to see whether your broker is licensed and registered.

To keep track of your account, review monthly or quarterly statements for fees, tax consequences, income, and performance; and schedule frequent meetings with your broker to review and make changes to your strategy.

Financial Planners:

Financial planners help investors develop a comprehensive plan for all aspects of finances. These include tax planning, estate planning, insurance, real estate, investments, and educational funding. While they offer an array of services, most planners specialize in one or a few aspects.

Because regulation of financial planners is dependent on the services they sell, it takes a little more work to research them. Knowing their specialty helps to expedite background checks. For example, financial planners offering investment advice should be registered with the SEC; planners offering insurance advice should be registered with the National Association of Insurance Commissioners (NAIC).

Banks:

Banks are often viewed as ‘one-stop shops’ for financial services. Banks offer a wide range of services including trust (i.e., corporate trustees), investment and legal advice, and custody. Because fees are often charged for each service, ask for a consolidated statement of accounts (i.e., investment, trust, and checking) to monitor aggregated fees. Most banks outsource their investment management. Frequent meetings are a must to ensure that your needs are being met.

Investment Advisors:

Registered Investment Advisors (RIAs) are registered with the SEC or state regulatory agency to manage the investments of others. RIAs differ from other investment professionals as they are legally responsible for the advice they provide-fiduciary responsibility- and must provide thorough disclosure of fees and services. It is important to understand an RIA’s investment philosophy. Some RIAs may focus on tax sensitivity and a buy-hold strategy, while others may invest according to quantitative models and regression analysis. Bottom line: find the right fit between your needs and the RIA’s strategy.