5 Mistakes When Hiring A Financial Advisor

The right advisor can make a significant impact on your financial health, so this is a decision worth getting right. 

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By Michael Johnston, CFA

By Michael Johnston, CFA

April 2024

The decision to hire a financial advisor is an important one. Building a relationship with a good financial advisor can significantly improve your financial health and likelihood of enjoying a worry-free retirement.

But not all financial advisors are created equal. Before agreeing to work with any financial professional, it’s important to do your homework and make an informed choice.

Here are five important questions to ask when evaluating an advisor.

1. Are They A Fiduciary?

The “fiduciary standard” is a legal requirement that compels financial advisors to place the interests of their clients above their own.

Practically, a fiduciary is prohibited from recommending financial products (like insurance policies or mutual funds) because he or she will receive a commission for doing so.

That type of arrangement creates an obvious conflict of interest, which fiduciaries are obligated to avoid.

This may sound like an obvious requirement of an advisor, but there are plenty of non-fiduciary advisors out there. Typically, non-fiduciary advisors are held to a less stringent “suitability standard.” Under a suitability standard, investment recommendations must be  suitable based on age, financial goals, and risk tolerance.

It’s important to ensure that an advisor is a fiduciary in every aspect of their work with you. Some advisors, for example, will act as a fiduciary while providing financial planning services but not when recommending insurance.

Ask a potential advisor if he or she is a fiduciary, and clarify that this applies to all aspects of your relationship.

2. Any History Of Violations?

Any history of bad behavior by an advisor should be an obvious red flag.

Fortunately, it is relatively easy to run a “background check” that will reveal any client disputes, legal actions, or other inappropriate behavior. FINRA’s “BrokerCheck” and the SEC’s Investment Adviser Public Disclosure are both free resources that will provide information about advisors. In addition to their experience and licenses, these resources will also show records of disputes:

Any disclosures when researching an advisor should raise a red flag and be thoroughly investigated.

One note here: these databases typically won’t include any reports of alleged or pending misconduct. So it never hurts to run a quick Google search, or simply to ask an advisor if there are any allegations or pending investigations that are not not yet showing up in the government databases.

3. Are The Fees Reasonable?

As discussed above, it is ideal to hire an advisor who is a fee-only fiduciary. The “fee-only” part of this description indicates that their compensation comes only from fees charged to clients, and not from commissions earned by recommending products.

When hiring an advisor, it is important to ensure that the fees charged are reasonable for the work performed. A good advisor will always be transparent about the fees charged, disclosing their pricing model in a straightforward manner and even helping potential clients to quantify the specific amounts that they could expect to pay.

Want help finding an advisor? WealthChannel’s free tool can match you with vetted financial advisors who serve your needs. Get started by taking this free quiz now.

4. Are They Experienced?

Ideally, your advisor will have a long track record working with clients and managing money. If he or she was selling software six months ago, that may be a sign that they’re more of a salesperson — and less of an advisor.

The aforementioned BrokerCheck and IAPD websites are good resources for learning about an advisor’s career experience.

When assessing experience, professional designations can also be a good indication of expertise. The Certified Financial Planner (CFP) designation is one of the most prestigious in the industry; it requires both mastery of various concepts of financial planning and relevant industry experience.

5. Is It A Good Fit?

While it’s important to screen for a competent and fair financial advisor, those two criteria alone aren’t enough. This is a professional relationship that may last for many decades. You will share a lot of information with this person, and will rely on their guidance to help you reach your financial goals.

In other words, you should like and trust your advisor. If it doesn’t feel “right” — even if the person checks all the other boxes — it’s okay to continue your search. It’s fine to prefer a male or female advisor. It’s perfectly fine to want someone with other clients similar to you.

If your initial impression is of someone who is disinterested and dismissive, that does not bode well for a productive relationship.

Ultimately, you need to like and trust your financial advisor. This is more art than science;, but it should also be fairly obvious if this criteria is being met. If not, don’t be afraid to continue your search until you find someone who feels like a better fit.

Bottom Line On Financial Advisors

Not all financial advisors are created equal. If you’re convinced that you would benefit from hiring an advisor, do your homework and find an advisor who is right for you. That means looking at fees, incentives, experience, areas of expertise, and temperament.

If you’d like a free introductory call with a vetted advisor from our network, use our Advisor Match tool (it takes less than 2 minutes to complete).

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