You've made the decision to consult with a professional advisor about your financial situation. Maybe your concerns surround planning for retirement or a specific situation like how to take your pension.
Regardless of why you are seeking the advice of a financial advisor, make sure that you do your homework and avoid these mistakes when selecting an advisor for you and your family.
Failing to understand the advisor’s experience and expertise
When choosing a financial advisor be sure that the advisor’s experience and areas of expertise are in line with your needs and your situation. For example, if you have issues surrounding taking your pension and evaluating your different options make sure that the advisor is knowledgeable in this area.
Is the advisor a CERTIFIED FINANCIAL PLANNER™ (CFP®) or some other professional designation? If so, be sure to understand what training and expertise this designation actually provides.
Confusing fee-only and fee-based compensation
The fee-only and fee-based compensation methods are often used interchangeably. They are not interchangeable and many consumers are confused by the two terms.
Fee-only means fee-only. The only compensation received by a financial advisor working as fee-only are fees paid by their clients. These might be hourly or a flat-fee for a specific project. For more ongoing work the fee might be a flat retainer or based upon a percentage of the amount the advisor is investing for the client. In any case, the advisor receives no compensation from the provider of the financial product.
Fee-based is also known as fee and commission and is generally some combination of the two. You will pay the brokerage firm a fee tied to the level of assets they are managing. In addition, the brokerage firm will collect fees generated by the mutual funds as well. While you are not directly paying these fees, you are paying them in the form of higher costs than funds that don’t generate these trailing commissions.
Fee-only advisors receive no compensation from the sale of investment or insurance products. When selecting a financial advisor, ask yourself whether you feel that a financial advisor who receives a significant portion of their compensation from the sale of financial products can really be counted on to recommend solutions that are in your best interest?
Failing to understand how your financial advisor is compensated can be a very costly mistake.
Using an advisor who is not a true fiduciary
Especially with the pending fiduciary rules from the Department of Labor, the issue of who is a fiduciary and what the advisor’s duty to you as a client is can be quite confusing. If the advisor is registered as an advisor with the SEC or their state, they are held to a fiduciary standard based upon that registration.
As a fiduciary, the advisor must put your interests first in all advice that they provide. If you are in doubt as to whether any advisor that you may be considering is a fiduciary ask them. And ask them to put it in writing.
Choosing a financial advisor who leads with the sale of a product
Financial advice is not about selling you a financial product so the advisor can earn a commission. Financial advice is about providing you with financial guidance in areas like retirement planning, investments, and tax planning.
If an advisor leads with the sale of the product, end the meeting or hang up the phone. This is not the advisor for you. Besides, how does the advisor know what types of financial or investment products are right for you before they’ve gotten to know you?
Believing the advisor’s claim that they can beat the market
If an advisor claims that they have the formula to beat the market, trust me they don’t. If they did why would they be sharing with you? Why wouldn’t they just invest their own money and go live on an exotic island someplace?
Choosing an advisor based on their name recognition
Whether it’s some star endorsing a national brokerage firm on TV or a catchy local ad campaign; publicity isn’t a good reason to choose a financial advisor or a firm. At the very least check out the advisor and the firm carefully to see if the hype matches the reality in terms of their capabilities, fees, and freedom from legal or regulatory sanctions.
Failing to check the background of the advisor or their firm
Like any professional, you should absolutely check on the background of any financial advisor you are considering. The Securities and Exchange Commission’s site has a section where you can check and verify the background of any financial advisor who is registered either with the SEC or at the state level.
FINRA broker check allows you check on any advisor who is or was in a broker-dealer environment.
In both cases, you will want to verify their background and to see if there have been any sanctions or complaints against the advisor or their firm.
Selecting the right financial advisor can be the start of a rewarding experience for both your finances and the quality of your life. Selecting the wrong advisor can be frustrating and costly to you.
If you're looking for a qualified advisor to help you through the maze of investing and financial planning strategies, there's a possibility I'm a good fit. Let's get started scheduling your FREE initial consultation here or call (785) 256-9150. As a fee-only fiduciary in dealing with my clients, I am only as successful as the success of my clients in meeting their financial goals. You will never wonder how much my services cost or if I'm acting in your best interests. Learn more here.
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About the Author:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.