9 Essential Considerations When Choosing an Investment Advisor

By: Jeff LeClair, Managing Director, investments, with Wells Fargo Advisors, LLC

Summary: Associations need a smart investment strategy, and that usually begins with the selection of a financial professional. What works for large companies may not work for smaller associations that need to be careful about reserves. Here are some points to consider when selecting an advisor.
What’s prompted you to find a new investment advisor? It might be a change in your organization’s needs, lackluster returns, lack of clarity, poor decisions, or simply due diligence. Whatever the reasons, the decision to make a change is a difficult one.

How do you select the right financial professional? It might be even more complicated to determine what type of advisor you need when most advisors seem to have the designation of consultants. In addition, there are sole proprietors, teams, small firms, and large firms to consider. Navigating this process may seem overly complicated, but it can be simplified by taking the nine points below into consideration.

  1. A nonprofit organization is very different than an individual investor or for-profit institution, so you need an investment specialist who is familiar with those types of accounts. Many advisors have experience with for-profit institutions or individual investors but lack expertise when it comes to nonprofit organizations. Some institutions choose an advisor that a member of the board trusts because he or she has worked with the advisor personally. However, this could be a recipe for disaster.
  2. Find someone who has a good reputation and has nonprofit references. This is critical. Make certain these are references of the advisor specifically and not just representative of the adivsor’s firm. How long has the advisor worked with these organizations? Does the advisor have any material blemishes such as lawsuits, arbitration judgments, or other issues that should be addressed?
  3. Have realistic expectations of what you need. The size of your organization plays a critical role in what you can expect from an advisor. If you are a small organization considering a large advisor team, you should clarify which consultant will be working directly with your organization and get comfortable with that person. If your organization is large, make certain you work with a team that has enough capacity and an infrastructure that will support the organization’s specific operational needs.
  4. If you have a long-term investment portfolio that is meant to protect the organization against inflation over time, you may need to find a fee-based consultant. This consultant can be from a Registered Investment Advisor firm, a broker dealer, or a solo consultant, because they all can accomplish something similar. What is most important is that the advisor will work with you on a fee basis to help you accomplish your plan. The fee-based contract can be based upon asset size or a flat amount, but it is important to understand what you are getting in return and to know where conflicts may be. It is rare to find nonprofits that are working with advisors on a transactional-fee basis, which is why most RFPs have language designed to screen out transactional advisors.
  5. Understand the philosophy of your advisor and whether it will mesh well with your organization’s needs. If your organization has an investment committee made up of people who only believe in passive management or indexing, then don’t introduce an advisor who believes solely in active management. Does your new advisor want to use separate account managers, and can your accounting department handle the monthly reconciliation? If your new advisor discusses the merits of hedge-fund investing through private placements, does your organization have the ability to independently verify the valuation come audit time? It is very important to be on the same page as your advisor.
  6. Understand the benefits and limitations of your advisor’s investment platform before you proceed. If you have a flat-fee contract with a Registered Investment Advisor or a flat-fee co-fiduciary consulting contract through a broker dealer or consultant, where will your assets be held? Are all of the assets going to be in the same location? Are there additional custody fees for this privilege or significant quantifiable transaction costs? Are you restricted from certain investments because of platform limitations or high minimum requirements, and do you have access to institutional share classes? Will you get the performance reporting that you want?
    If you have an asset-based fee contract and are keeping all of the assets at one broker dealer, then are you investing in mutual funds, ETFs, separate account managers, individual bonds, alternative investments, or private placements? What types of platforms does your advisor have access to and what kind of open-architecture limitations for investment selection may exist? Do you have access to institutional-class mutual-fund shares and no-load mutual funds? As you take a closer look at your advisor’s platform options, regardless of who you are working with, you need to fully understand the limitations and potential conflicts.
  7. The right advisor choice may not always be the lowest-cost option. Sometimes you get what you pay for when it comes to an institutional advisor. Highly recommended advisors may have a minimum fee that is necessary to meet their service model. How often is your advisor going to be available to discuss strategy options, customize information, give you updates, and work through issues like investment-committee education?
  8. Beware of advisors who promise high returns. Question them about their capital market assumptions to better understand how they view the world. Is an advisor showing you hypothetical returns from a portfolio mix or actual results from client portfolios?
  9. It’s all about trust. As long as you feel good about the answers to the considerations above, then it doesn’t matter if your advisor is from a Registered Investment Advisor, a broker dealer, a consulting firm, or a trust department. What matters most is that you feel a sense of trust in the integrity of the advisor and the resources of the firm.


Jeff LeClair is managing director, investments, with Wells Fargo Advisors, LLC, and a senior institutional consultant with the firm’s institutional consulting group in McLean, Virginia. Email: jeff.leclair@wellsfargo.com

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