5 Mistakes People Make When Choosing a Financial Advisor

When dealing with your finances, it may be tempting to choose a financial advisor and get started with the process right away. However, it is important to keep in mind that you need to choose someone who is aligned with your financial goals and can help with your specific needs.

Bad incentives, conflict of interests and not having the right strategy can affect your finances. Here are some things to look out for.

Restricting your Choices

There are a variety of different financial advisors out there that specialize in different areas and it is your job to find one that best suits you. For example, some advisors focus on high-net-worth individuals and others specialize in those who are early in their career and looking to save. Since the term “financial advisor” is so broad, you’ll need to hunker down on your research and interview a few advisors before finding the one for you.

In addition to finding the right specialty, you’ll want to find someone with about the same risk tolerance as you. An advisor who is more inclined to choose risky investments with high returns when you prefer to keep it conservative is probably not the right fit.

Remember that you are the boss of the situation. You need to find someone who is aligned with your financial goals and how risky you want to play the game. Since after all, it’s your money at the end of the day. 

Going with a Financial Advisor who Goes by the Suitability Standard

The wrong incentives can make even the most trusted people do interesting things. To break it down, you’ll need to understand the difference between the Fiduciary Standard vs. the Suitability Standard. By definition, a fiduciary is someone who is required by law to keep your best interests ahead of their own. So by keeping a fiduciary standard, an advisor will always keep your interests first even if it is to their detriment or disadvantage. 

However, this isn’t always the case as some financial advisors wear many different hats. To explain, the suitability standard is when an advisor can make recommendations that are simply suitable for you after assessing your needs. It is not up to the highest standard of choosing the strategy that best suits you–kind of like putting duct tape on a broken window instead of replacing it. 

Many also sell other products or services for a big commission paycheck in return. For instance, if a financial advisor also has an insurance license they may recommend certain types of insurance that gives them the biggest commission paycheck instead of something appropriate for you. An advisor doesn’t need an insurance license to provide you with sound advice on what type of insurance you’ll need. In fact, some say that it is better if an advisor doesn’t know the incentives attached to insurance types since they are less likely to recommend the wrong type. Though if they do have an insurance license and are 100% fiduciary, knowing which specific coverage plan and company absolutely works best for you is to your advantage.

Not Having the Whole Picture of How They’re Paid

In understanding how financial advisors are paid, there are typically two terms that they fall under: fee-only and fee-based. They can easily be mixed up but there is one key difference that you must take into account when choosing a financial advisor. 

A fee-based advisor is someone like the insurance example above. They can charge you a transparent fee for their advising services whether that be hourly or a percentage of your assets. However, the catch is that they might not be acting as a fiduciary at all times and sell you products in return for a commission instead. 

A fee-only advisor is what the title suggests–only a transparent fee will be charged for the services provided and they will never sell additional products for a commission. 

Assume They Have the Right Credentials

According to the U.S. Bureau of Labor Statistics, there are over 200,000 personal financial advisors within the United States. Many are working with big brokerage firms–though don’t be fooled into assuming they all have the right credentials.

The requirements to be hired at a brokerage firm are to pass a securities exam whether that be the Series 7, Series 65, or Series 66. The most important thing to search for when finding a financial advisor is to ensure that they have a certified designation in the field. For example, only about 88,000 financial advisors have the CFP designation–that’s only about 44% of all financial advisors. Rightfully so since it is the ethical standard of excellence and expertise due to their rigorous certification process.

A surefire way to make sure that an advisor has the ability to do the job well is to first look if they have the designation since they would be proud to showcase that, and to check their references. Advisors shouldn’t have anything to hide and should be more than willing to offer references for potential clients. It doesn’t take long on your end and worst-case scenario, you spend a little over five minutes of your time instead of losing all the hard-earned money you worked for.

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If you are in need of some sound advice from the right financial advisors, contact us here. We always put your interests first and will make every effort to make a financial plan that works for you and your goals.