Did you know anyone can call themselves a financial advisor?
Or a financial planner, a wealth manager, an investment manager… the list goes on and on.
Believe it or not, these titles have no legal or regulatory meaning.
They’re not evidence of experience or education.
They’re just marketing tools.
In fact, you could call yourself a wealth manager right now if you wanted!
That’s just one reason why finding a trained, experienced, and legitimate financial advisor who works in your best interest at all times and won’t sell you and products is tough.
The professionals who do a great job are out there. But they’re hard to spot amongst salespeople and agents who work on commission and aren’t legally required to put your interests ahead of their own.
It sounds crazy, but that’s how the industry is currently set up.
So it falls on us to understand what to look for when we hire a financial planner — and what mistakes to avoid.
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- 10 Biggest Mistakes to Avoid When Hiring a Financial Planner [Free PDF Guide]
- The Bumpy Road to Outperformance [Vanguard Research]
- Morningstar Website to Locate Your Expense Ratios
10 Mistakes to Avoid When Hiring a Financial Advisor
If you want to get a head start on the podcast, here are 5 of the 10 biggest mistakes you will want to steer clear of:
Mistake #1: Hiring an Advisor Who’s Not a Fiduciary All the Time
One of the most important questions that you can ask any financial professional is, “are you a fiduciary?”
In fact, you should avoid working with any advisor who isn’t a fiduciary. This word means that they’re required — by law — to put your interests ahead of their own.
A fiduciary puts your interests first.
Unfortunately, it’s not always as easy asking the question and getting a “yes” answer. The problem? Some financial advisors act as a fiduciary… sometimes.
There may be times when they operate as a fiduciary. But they might also take that hat off and put on another that holds them to what’s known as the “suitability” standard.
Suitability means they only need to prove that a product is suitable for you. They don’t need to take into consideration fees, quality, or expected investment return of their recommendation.
When advisors work under the suitability standard, it’s possible they’re earning a commission for selling you a product. This should be disclosed to you, but the method of compensation can create massive conflicts of interest.
Just about every big brokerage firm you know by name operates under this suitability standard. Sometimes they act as a fiduciary, but not all the time.
You can get crystal clear on whether or not an advisor will work with you as a fiduciary at all times by requesting they sign a fiduciary oath on your behalf. If they refuse to sign, keep looking for someone else to provide financial advice.
Mistake #2: Not Working with a CFP® Professional
Remember how anyone can call themselves a “financial advisor” or a “financial planner”? Those terms aren’t regulated. But other designations are.
You want to search for financial advisors that have the CERTIFIED FINANCIAL PLANNERTM (CFP®) certification.
Only about 25% of financial advisors hold the CFP® certification, and there’s a reason for that: CFP® Board requirements are much higher than simply passing a securities exam. And a college degree is a requirement for CFP® Professionals.
CFP® Professionals are trained to help you plan around every aspect of your financial life with a holistic, comprehensive approach. Other advisors often have much less expertise. They simply don’t have the same level of rigorous training and education in financial planning.
Mistake #3: Choosing an Advisor Who Focuses Only on Investments (and Skips the Comprehensive Planning)
Much like a doctor, financial advisors need to diagnose your issues before they start prescribing solutions. This usually involves asking tons of questions about your unique financial situation, your goals, and your income.
If a financial advisor starts “prescribing” investment recommendations without asking enough questions to fully understand your situation, move along.
Or if they push a handful of investment options right away without proposing any sort of underlying financial plan, get outta there.
Fee-only financial planners who hold a CFP® certification and adhere to a fiduciary standard don’t typically lead with investments.
They lead with a financial plan — which is a living and breathing document that should change and evolve with your goals, your changing financial situation, and your life.
By creating your financial plan before constructing your investment portfolio, you ensure your investments work to help you reach your goals.
Mistake #4: Prioritizing Brand Name Recognition
You’ve likely heard of a lot of big firms. And that can lead you to gravitate toward those companies when you want to hire a financial advisor — you recognize the names, feel familiar with the brand, and think they have the experts you need.
But big firms (who also have big advertising and marketing budgets) tend to charge higher fees. And those experts? Again, their titles could just be marketing tools that offer no indication of their actual background or training.
Big firms exist to enrich their shareholders and usually do so at the expense of their clients. Higher fees don’t guarantee a better outcome for the investor.
In fact, the more you pay in fees, the less money you have to invest. Fees can eat away at your nest egg faster than low returns or poor investment performance.
Working with an independent, fee-only financial planning firm means that the advice you receive comes from a professional dedicated to helping you reach your goals. Independent firms don’t exist to sell their parent company’s mutual funds — or anything else.
Financial planners at independent fee-only financial planning firms give the best possible conflict-free advice.
Mistake #5: Believing Advisors Who Promise to “Beat the Market”
Beware any financial advisor who tells you they can “beat the market.”
It’s just about impossible for anyone to consistently outperform the broad stock market indexes. And most actively-managed mutual funds fail to beat their benchmark after fees.
But if that’s true, then why would someone try to convince you otherwise? It’s really easy for financial advisors to create a “back test” to show you what their portfolio could have done in the past.
This allows them to cherry-pick the best mutual funds and say, “hey, look what we would have done for you if you hired us ten years ago!” Unfortunately, past performance doesn’t guarantee future results.
Stay skeptical of any financial advisor who promises huge returns. Instead of trying to beat the market, you want an advisor who helps you focus on the things you can control, like fees, asset allocation, asset location, tax efficiency, risk tolerance, and risk capacity.
The Other Red Flags to Watch for When Hiring an Advisor
There are a lot of financial advisors out there — and when they’re not all created equal, who you choose to work with really impacts your ability to reach your goals and achieve financial success.
Knowing the warning signs and red flags can help you navigate through a sea of choices and focus on the advisors who truly offer comprehensive planning with advice that’s in your best interest.
Want to learn what other mistakes to avoid when hiring an advisor? Click here to download the PDF guide or listen to this week’s podcast episode.