Countless Americans turn to financial advisors to help them plan for their financial future. If you don’t know a lot about financial matters, it makes sense to seek the help of a professional. However, many folks don’t trust their financial advisors. In fact, a 2016 poll conducted by the American Association of Individual Investors showed that 65% of participants mistrusted their financial professionals to some degree.
The general mistrust of financial professionals can lead to the potentially dangerous decision of making financial decisions on your own. While it’s a good idea to educate yourself about short-term and long-term financial strategies, trying to “wing it” on your own could lead to serious financial trouble. Most of us are not financial experts. Working with the right financial professional could mean the difference between a comfortable retirement or one that just barely covers the basics.
Choosing the right financial professional for the job can be intimidating. How do you find an advisor you can trust? How do you know your financial advisor has your best interests at heart? Here are some steps you can take to help you find a trustworthy financial professional.
Choose a Fee-Only Advisor
A fee-only advisor is one who does not accept commissions. An advisor who accepts commissions could have a conflict of interest, meaning he may be more interested in lining his own pockets than choosing what’s best for your financial future. A fee-only advisor is generally paid by the hour, or they may charge a percentage of your assets. The National Association of Personal Financial Advisors is a great resource for finding a fee-only advisor. Note that a “fee-based” advisor receives a blend of fees and commissions-definitely not the same thing.
Know What Type of Financial Professional You Need
There are a lot of different types of financial professionals, and each one specializes in a certain area. In fact, there are actually more than 200 designations for financial advisors. It’s important to know what you’re shopping for before you start asking questions. Here are some of the most common designations:
- A Certified Financial Planner (CFP) is one who specializes in a little bit of everything. They will help you with your entire financial picture. A CFP has passed a series of exams that include topics like retirement and estate planning.
- A Chartered Financial Analyst (CFA) specializes in investing and portfolio management. They have passed a series of rigorous exams that show commitment to their profession and higher ethical standards.
- A Certified Public Accountant (CPA) is a tax expert. A CPA, like the ones at tempCFO, specializes in all aspects of personal, business, and executive tax planning. Your CPA will ensure that you adhere to all necessary tax regulations
- A Chartered Financial Consultant (ChFC) has specialized training in the areas of insurance and estate planning.
Get a Recommendation
No matter what type of service you’re looking for, getting a good recommendation from a long-term client is a great place to start. Talk to friends, family, and co-workers to see who they’re using and if they would recommend them to others.
Interview Prospective Advisors Carefully
Now is the time to be picky! You should interview several different prospects before settling on one. If you are uncomfortable talking to a certain prospect, then move on to a different one. Take advantage of any complementary introductory sessions offered to ask lots of questions. Ask about his or her background and core values, specific areas of expertise, their investment policy, and how they get paid. Be sure that you have a complete understanding of the services that will be covered before you sign any sort of agreement.
The prospective advisor should be asking you questions, too. For example, they should be interested in your goals, your income needs, your tax status, and even your age and health -especially before they start recommending any specific investments. If a prospective advisor is pushing you toward some hot investment in the first five minutes of your meeting, run the other way.
Only Work with Investment Advisors That Use a Third-Party Custodian
A third-party custodian, such as Charles Schwab or Scottrade, will hold on to your money, instead of allowing the advisor to do it. Your account statements will come from their office instead of your advisors, too. If a crooked investment advisor is allowed to hold your money in his own custody, he could fudge your account statements and drain your savings, Bernard Madoff style.
Do a Thorough Background Check Before Making Your Final Selection
When it comes to your financial future, there’s no such thing as being too cautious. Run a background check to look for criminal history. If your potential advisor is a registered broker, use the website www.finra.org/brokercheck to check him out. You can also check with your state securities regulator to see if he or she has had any disciplinary actions taken against them. Also, go here to view the prospective advisors Form ADV and check into their background and employment history. It’s better to find out about any skeletons in their closet now, before you are left with an empty bank account.
Look for a Fiduciary
A fiduciary means that the advisor has pledged to act in their clients’ best interest at all times. Financial advisors who aren’t fiduciaries are held to a lesser standard. They can sell you anything they deem to be suitable for you, even if it’s not ideal or in your best interest. This point is critical. In fact, as of June 2017, financial advisors who work with retirement accounts are required to adhere to the fiduciary rule.
Watch for these Red Flags
If something just doesn’t feel right, move on! Here are some red flags to watch out for:
- They make promises they can’t possibly guarantee, like beating the market.
- They don’t listen to you.
- They pressure you into taking risks you’re not ready for.
- Their fee schedule is confusing or they receive commissions or referral fees.
- They aren’t able to answer your questions and they seem inexperienced.
Following these steps will help you find an experienced financial professional that you can trust. Remember, it’s okay to be picky… it’s your hard earned money!
