Wealth management advisors include stockbrokers, discount brokers, and portfolio managers—which is right for you?

A do-it-yourself approach to investing can sometimes be more than overwhelming—it can cost you money. This is one of many reasons professional help can be an important part of any investing strategy.

The best place to start is by picking your wealth management advisor. You have to choose the way you invest your money, and whether to use a full-service stockbroker, a discount broker, or a portfolio manager. This decision is no formality; it will play an important role in the way you approach your investments.

How to pick a broker who can contribute to your investment success

• Choose a stock broker who specializes in your kind of investments. Some brokers focus on risky areas, such as penny mines or options. Others mainly sell stocks, bonds and mutual funds. They’ll bring little enthusiasm or expertise to areas outside their specialty. If your broker’s interests differ from yours, get a new broker.

• Choose a stockbroker who will value your business. A broker who mainly handles million-dollar clients may agree to handle your $100,000 RRSP account. But don’t be surprised if you wind up dealing with his or her fresh-out-of-school assistant.

• Ask lots of questions. Some of the world’s worst brokers are the most charming, most glib, nicest-looking and best-dressed people you ever met. When you judge investment knowledge, look deep. Anybody of average intelligence can develop a veneer of investment expertise. Ignore appearances and use the “encyclopedia buyer’s trick”: ask questions to which you know the answers.

• Put a high value on experience. Bad brokers are not necessarily bad people. Some give bad advice because they earn more commissions that way. Others are inexperienced and just don’t know any better. But the longer an individual works as a stockbroker, the more he or she can tell you about risk, and that’s essential for successful investing.

The pitfalls of using stockbrokers as wealth management advisors

Most stock brokers are commissioned sales people who make investment recommendations that you can accept or reject. There’s nothing inherently wrong with this arrangement, but it can introduce conflicts of interest that can influence your broker’s recommendations, and you should be aware that this might not always work in your favour.

For instance, your stock broker’s income is proportional to the frequency of your trading, but increased trading is likely to cost you money. Commission rates vary among investments, which gives brokers an incentive to sell the investments that pay the highest commissions. But a general rule is that the riskier an investment is the more commission a stockbroker earns for selling it.

In addition, stock brokers have no “fiduciary relationship” with their clients. They are not legally required to do what’s best for the client. They are just supposed to try to make sure that the securities they sell are “suitable” for their clients. “Suitable,” of course, can cover a wide range of desirable and not-quite-so-desirable securities.

Portfolio managers as wealth management advisors

Portfolio managers don’t simply present you with investment advice that you can accept or reject, they generally make and carry out investment decisions for you, for a fee.

As part of their stock market research, portfolio managers gather information from companies, industry studies and other sources. A good portfolio manager then tries to build their client a portfolio that makes money if things go well, but won’t lose too much if the opinions turn out to be faulty, as often happens.

Having a trusted investment advisor like a portfolio manager can help you formulate a well rounded plan.

Wealth management advisors should be trustworthy

Many of our portfolio clients tell us they chose us to manage their investments because they feel a deep sense of trust in our investment capabilities. Obviously they have confidence in the gains we have achieved, both in our newsletter recommendations and our portfolio management results.

But they also feel an extra sense of trust due to the way we set up the business, to eliminate conflicts of interest, which ensures that our clients get our unbiased recommendations with no fear of hidden costs. This sets us apart from most investment services: you can find out more without any obligation.

If you hire us to manage your investments, we tailor your portfolio to your own unique situation—your specific goals, your temperament, your financial situation. We work for your convenience, not ours.

Have you worked with any type of wealth management advisors? How have they helped your investing career? Share your story with us in the comments.