Choosing a financial advisor is a big decision. Being aware of these seven common blunders when choosing an advisor can help you find peace of mind, and avoid years of stress.
1. Hiring an Advisor Who Is Not a Fiduciary
By definition, a fiduciary is an individual who is ethically bound to act in another person’s best interest. This obligation eliminates conflict of interest concerns and makes an advisor’s advice more trustworthy.
If your advisor is not a fiduciary and constantly pushes investment products on you, it’s time to find an advisor who has your best interest in mind.
If your advisor is not an fiduciary, at TRA we can serve as a delegated 3(16) plan administrator providing 3(16) fiduciary services for your retirement plan. We relieve the business owner or sponsor of many of the day-to-day administrative burdens associated with sponsoring a plan.
2. Hiring the First Advisor You Meet
While it’s tempting to hire the advisor closest to home or the first advisor in the yellow pages, this decision requires more time. Take the time to interview at least a few advisors before picking the best match for you.
3. Choosing an Advisor with the Wrong Specialty
Some financial advisors specialize in retirement planning, while others are best for business owners or those with a high net worth. Some might be best for young professionals starting a family. Be sure to understand an advisor’s strengths and weaknesses – before signing the dotted line.
4. Picking an Advisor with an Incompatible Strategy
Each advisor has a unique strategy. Some advisors may suggest aggressive investments, while others are more conservative. If you prefer to go all in on stocks, an advisor that prefers bonds and index funds is not a great match for your style.
5. Not Asking about Credentials
To give investment advice, financial advisors are required to pass a test. Ask your advisor about their licenses, tests, and credentials. Financial advisors tests include the Series 7, and Series 66 or Series 65. Some advisors go a step further and become a Certified Financial Planner, or CFP.
6. Making Assumptions When They are Affiliated with a Reputable Brand
An advisor might appear qualified and professional due to an association with a major firm like J.P. Morgan or Morgan Stanley. Working with an advisor from a reputable firm can lead to stability and better tools and information. However, choose an advisor because they are the best fit, not because of their branding.
7. Not Understanding How They are Paid
Some advisors are “fee only” and charge you a flat rate no matter what. Others charge a percentage of your assets under management. Some advisors are paid commissions by mutual funds, a serious conflict of interest. If the advisor earns more by ignoring your best interests, do not hire them.