Don’t Make These 6 Mistakes When Choosing a Financial Advisor
Decisions made by a financial adviser can be the difference between opting out of a millionaire – and not. But when choosing a financial advisor, experts say many people make costly mistakes. Here are some of the most common. (Use this tool to get matched with a planner that meets your needs.)
Mistake #1: You didn’t ask how your financial advisor had been paid
“Generally, it’s best to work with paid advisors who will charge you either a flat percentage of your assets under management or a flat fee for their services. If you work with an advisor who earns a commission on various investment products, that’s a red flag,” says Ismat Mangla, Senior Content Manager at LendingTree. Some paid planners charge an hourly or annual fee, but more often they charge a percentage of assets under management, which means the advisor deducts their fee directly from the client’s account, based on the account balance.
Note that a paid planner and paid planner are not the same thing, as MarketWatch Picks explains here: “A paid planner operates on commissions and may be incentivized to recommend or prioritize a product over other actions or things in your plan, like saving for a rainy day. A paid planner gets paid only on what you pay them for their time, strategy, and money management.”
Mistake #2: You worked with a “free” advisor
If an advisor offers you free advice and services, they have to be paid some other way, says Bobbi Rebell, a certified financial planner and personal finance expert with the debt management app Tally. “It’s not a problem in itself, but it can influence the advice they give you,” says Rebell. If they earn a commission on a product they sell to their customer, it’s unclear if they’re recommending it because they make money from it or because they actually think it’s beneficial to the customer. Mangla adds, “You want to make sure that the financial advisor you choose is a fiduciary, someone who has a legal and ethical duty to act in the best interests of their clients.” Advisors who work “for free” often don’t. To check whether a financial adviser is a fiduciary, visit napfa.org or the SEC’s adviser database.
Mistake #3: You haven’t shopped
You want to make sure you feel comfortable with an advisor and fully understand and check their references. For this reason, it’s important to shop around, interview different candidates, and see which personality you have the best connection with. “Start by looking for recommendations from people you trust and do your due diligence in reviewing them,” Mangla says. (Use this tool to get matched with a planner that meets your needs.)
Mistake #4: You haven’t clarified your goals and expectations with the advisor
It’s a common mistake people make, says Arielle Jacobs-Bittoni, financial planner at Refresh Investments. Communicate what your short and long-term goals are and how often and by what method you plan to communicate with your advisor. And Mangla says you should have a clear idea of what you need help with. “It’s important to first think about what goals you want to achieve with a financial advisor. Do you want investment advice? Help with debt management or tax planning? says Mangla.
Mistake #5: You haven’t checked an advisor’s references or background
“There are many ways to check a potential advisor’s background, such as CFP Verify and FINRA’s Brokercheck. You can make sure an adviser has the credentials they advertise, look at their years of experience, which companies, and when they passed their licensing exams,” says Tiffany Lam-Balfour, investment spokesperson for NerdWallet. You can also see if they have had customer complaints in the past.
Mistake #6: You didn’t make sure their investing and planning philosophy matched yours
“Determine whether the advisor’s investment philosophy matches yours,” says Jacobs-Bittoni. Grace S. Yung, Certified Financial Planner at Midtown Financial Group, says good advice is to make sure you look at the three Ps – “People, Their Philosophy, and Performance. What I mean by that is that you should never hire someone just because your buddy says they gave them good returns or performance. Performance can come and go and is only one aspect of the relationship between you and your advisor. You also need to make sure you click with the advisor and agree with their investment and life planning philosophy,” says Yung.