Month: March, 2017
Hiring a qualified financial advisor is one of the smartest moves any busy professional can make. By letting a professional advisor guide you toward smart investment choices, you can benefit from their expertise and focus your time on things you enjoy.
6 Red Flags to Watch Out for When Hiring a Financial Advisor
But, what happens if you hire the wrong financial advisor? Unfortunately, all the benefits go out the window. Keep in mind that thousands of “investment salespeople” masquerade as financial advisors in droves, leaving millions in damage and lost earnings in their wake.
This is part of the reason all the drama surrounding the fiduciary rule took place. Without any rules governing the actions of these professionals, many so-called “financial advisors” are happy to line their pockets at your expense.
To avoid hiring a financial advisor who will leave you worse off, you need to know what to look for. Here are six red flags that should leave you running for the door:
#1: They don’t want to tell you how they get paid.
Most financial advisors are either fee-only or fee-based. Unfortunately, these designations aren’t even close to the same thing. Where fee-only advisors get paid a flat fee for their advice, fee-based financial planners can work for a flat-fee or for commission on a product they sell.
If you want to work with a financial advisor who will always work in your best interest, make sure you choose a fee-only financial planner. That way, you’ll never be pushed toward a specific financial product because it pays your financial planner a huge commission.
It’s not that fee-based planners are all bad; it’s that they can’t possibly look out for you when their income depends on how you invest.
If you ask a financial planner how they get paid and they offer a wishy-washy answer, run toward the nearest exit and don’t look back. If their pay is so complicated they can’t really explain it, that’s never a good sign.
#2: They aren’t a CFP® (CERTIFIED FINANCIAL PLANNER™) Professional.
When hiring a financial planner, you should want the best. So, why not hire someone who has gone through the most comprehensive training possible?
While there are more than 300,000 financial planners in the United States, not all of them have a college degree. Further, only 25 percent of financial advisors have gone the extra mile to earn their CFP® designation (Source: cfp.net).
Where fee-based financial advisors are mostly taught to sell investment products, CFP® professionals are taught to take a more comprehensive approach to wealth management. And since earning the CFP® designation requires more education and higher standards overall, most CFP® professionals are at the top of their game.
#3: They focus most of their “practice” on selling insurance.
As mentioned already, thousands of insurance salespeople run around calling themselves financial advisors. If your “advisor” comes from a firm that is known for its life insurance offerings, you should start looking for a new one stat.
Many “advisors” who work for life insurance firms are barely qualified to offer investing advice, let alone help you create a comprehensive financial plan. There are certainly exceptions, but I dare you to ask your life insurance advisor how they get paid or if they’re a CFP® professional. I can almost guarantee you won’t like the answer you hear.
#4: They sell first and ask questions later.
A good financial advisor needs to ask a ton of questions before they begin offering advice. They’ll need to know how much you earn, your short-term and long-term goals, your appetite for risk, and a number of other details to even know where to start.
If your financial advisor starts selling before they ask any questions, this is a red flag of epic proportions. After all, how can they know what you need when they have no idea where you’re coming from?
#5: They insist they will help you “beat the market.”
Some financial advisors make crazy promises, including the one where they say they say they’ll “beat the market.” First off, it’s almost impossible for anyone to consistently outperform the broad stock market indexes. Second, most actively-managed funds that strive to outperform the market offer outsized investment fees that will eat away at your returns.
Your financial advisor’s goal should be helping you achieve the greatest return with the lowest fees possible. They should also be helping you with things in your financial life that you actually have control over. Hint: the direction of the stock market is not something you, or anyone, has control over.
If they focus only on the investment return without any mention of fees, that’s a huge red flag. And, if they make crazy promises that don’t apply to real life? That’s never a good sign, either.
#6: They aren’t a fiduciary 100 percent of the time.
A fiduciary is legally obligated to work in your best interests. Unfortunately, not all financial advisors operate under the fiduciary standard 100 percent of the time.
Some financial advisors work as fiduciaries when it pleases them, but take off their “fiduciary hat” and operate under the “suitability standard” when they could potentially earn more.
Where the fiduciary standard requires your advisor to offer advice that is in your best interest, suitability means they only need to prove a product is suitable for your risk profile. In other words, they don’t need to take into consideration fees, quality, or performance.
By choosing a fee-only advisor that is a fiduciary 100 percent of the time, you’ll never have to worry whether your financial advisor is offering you the best advice – or just selling you something.
And if you want to know whether your financial advisor is a fiduciary all the time, just ask. If this question makes them wriggle in their seat, you know what to do.