What is a custodian? Know your custodian. Custodians hold your assets, process trades and provide independent statements. Large custodians are Charles Schwab, Fidelity, Pershing and TD Ameritrade. Many stockbrokers are their own custodians like Morgan Stanley.
Separately, Certified Financial Planners® and Registered Investment Advisors are not interested in being custodians. They work as independent professional advisors who specialize and advise in financial planning or investment advisory roles. The Certified Financial Planning Board of Standards has been a strong proponent of transparency and investor protection.
Advice or products? Know the difference between a registered representative and investment advisory representative. Stockbrokers and insurance agents are usually commissioned sales people. An investment advisory representative (IAR) works for a fee and avoids commission products.
This gets to the heart of advice. Do you want your advisor based on commissions or a fee for service? We believe a fee based business relationship aligns the goals of both advisor and client.
How about certifications? Know the top certification designations in the investment and planning market. If your advisor has something different, find out why.
Some certifications are done over a weekend. Some are multiyear programs.
The CFP® is an internationally recognized financial planning designation, usually an 18 month program. Certificants must pass a 10 hour exam administered by the Certified Financial Planning Board of Standards.
The CFA® is an internationally recognized financial analyst designation, usually a three year program. Certificants must pass three tests administered by the CFA Institute.
The CIMA® is an internationally recognized investment management analyst designation, usually a one year program. The educational curriculum is jointly managed by the Investment Management Consultants Association and The Wharton School, University of Pennsylvania or the Haas School of Business, University of California, Berkeley.
The brokerage industry trains personnel in sales, not investments. Brokerage investment training is usually done by wholesalers training stockbrokers about their product. Stockbrokers usually study a book for 4 weeks to get a Series 7 license. Very little of the licensing test has anything to do with managing money.
Make sure the advisor is legit. Did they come with a referral? Are they new to the industry? Most anyone can get set up. Do not stop there. Industry websites exist and offer background checks. Check your stockbroker at FINRA.org or your investment advisor at SEC.gov. Do they change firms often? Were they changing tires last year?
Do they insist on complete control of your money? Avoid unknown or unregulated managers. Avoid managers that insist on secrecy. An investment advisor may want discretionary control on investment transactions, but never wants control to remove monies or securities. Changing custodians only happens with your written authorization. Checks for investment should only be payable to the custodian of the money. Never write a check to an advisor.
Be careful of affinity groups. The largest ponzi scheme of all time is in the news. Bernard Madoff’s clientele came from country clubs and religious based charities. A recommendation from a friend or colleague is good, but make sure everything checks out.
With the bankruptcy of Lehman Brothers and the forced merger of Merrill Lynch, Bear Sterns and Wachovia, you may ask how safe your investments are with those companies. This is why it is important to understand SIPC – Securities Investor Protection Corporation. Many firms also have additional insurance such as CAPCO or Lloyds of London. Ask your custodian about the additional insurance and how it applies to your accounts. In this economic environment, it is prudent to do a regular review of your custodian and the additional insurance coverage if they apply to your situation.