How do we determine which financial firm is best for managing our money?

We have multiple financial advisors wanting to help us manage our money. Most of the firms have an invest, diversify, and hold strategy. The most recent firm that wants to manage our money sounds like they are a little different in that they are more proactive in looking ahead and positioning assets for long term. With all of these firms, how can we decide which one is best? Is there a ranking based on return versus benchmark return?

Investing, Asset Allocation, Choosing an Advisor
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2 weeks ago

Great question.  When you go to buy a mutual fund you’ll see a set of numbers clearly showing you the fund’s short and long term track record.  A financial advisor’s investment track record is similarly quantifiable, but few advisors volunteer that information.  That puts most investors at a disadvantage. 

But you’re smart to be asking these questions, because you need to see how well the advisor is doing for their clients after all fees and costs are deducted.  Without that, you don’t have the information you need to determine if they are doing a good job.    

There is a measure that is used to compare advisor performance, and that is called “GIPS”.  That stands for Global Investment Performance Standards.  These are international best practices maintained by the CFA institute.  To comply with GIPS, a firm must provide data in a specific format, then have it independently verified by a third party.  The net result allows you to compare apples to apples so you can easily evaluate money managers.

Unfortunately use of GIPS is not common.  Our firm is one of about 1,600 firms worldwide that voluntarily disclose our results so our clients can see them.  Most firms that adhere to these standards serve the institutional world, not individuals. But we do, since we are committed to transparency.

I recently wrote an article about why GIPS is a great tool for investors:

https://arroyoinvestmentgroup.com/what-are-gips-standards-for-financial-advisors/

Of course, no firm can or should promise consistently high returns. If they do, that should be a red flag.  Instead you want to see that they can generate net returns (after all fees and expenses) that meet or beat the indexes, with less risk. 

Financial planning is also important, so I recommend that you look for someone who has obtained the Certified Financial Planner credential, which is a respected credential.  And you’ll want to look for a firm that is fee-only, to minimize conflicts of interest.  You also would be well-served to ask any firm you’re considering to confirm in writing that they will serve as your fiduciary 100% of the time, which legally requires them to always put your interests first. 

Unfortunately it’s not always easy to get the facts you need to make a sound decision.  So we have created a free ebook to help you learn the best questions to ask, which can be found on our website at https://arroyoinvestmentgroup.com/.

Best of luck in your search.

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