Hiring a Financial Advisor? Here's What You Should Look For
Are you frustrated with how the financial industry does business? Even coming from me, a financial advisor I believe that the average consumer has every right to feel frazzled by a business they do not truly understand. The lack of transparency in the financial realm makes it difficult to understand what you are signing up for and how you should set your expectations. Combining these two aspects only sets the foundation for future frustration as you try to navigate in this unfamiliar world.
Hiring a financial advisor should help to put your mind at ease. A good financial advisor can explain all of your options and make personalized recommendations based on your financial goals. However, you must be careful when it comes to who you hire. Here are a few things you must keep an eye out for before hiring a financial professional of any kind.
1. Always ask if your advisor is a fiduciary.
First and foremost, you need to ask your advisor if he or she is a fiduciary. By law, a fiduciary must always put your interests first. This is the single most important question you could ever ask. If they respond in the negative, then it is time for you to move on to a different professional.
Unfortunately, the vast majority of the financial industry is not bound by law to keep your best interests in mind. Some financial advisors earn more for selling you specific products and investments. These kickbacks are not always in your best financial interest, but the average consumer cannot often distinguish this small detail. As a result, this inherently creates a conflict of interest, and puts you and your financial advisor on the opposite sides of the table.
Could you imagine if this was the case with your doctor or your lawyer? Most of us couldn’t even begin to imagine it, so don’t consider hiring a financial professional who doesn’t abide by these moral standards. Keep searching until you find a fiduciary that suits you – it will be well worth the extra work!
2. Understand incentives.
The issue with the financial industry at large is not that it’s overrun by unethical individuals but filled with bad incentives structures. This is why it is always essential to ask your advisor just how they are getting paid. Understanding the motives of each incentive is important if you want to select the right financial professional.
For example, you might want to compare the incentive for a commission-based advisor and a fee-only advisor. A commission-based advisor will only make money if there is a transaction, meaning that his incentive is to sell you something. A fee-only advisory makes income only from you whether it’s in the form of a flat fee, assets under management fee or an hourly engagement. This generally results in an aligned incentive with the client instead of being on the other side of the table. There are many different ways to look at incentives, so be sure to weigh this consideration carefully before choosing a financial advisor.
3. Avoid advisors who are market-performance based.
Does it feel counterintuitive to you that you should avoid market-performance based financial advisors? Let’s take a closer look at the two reasons you should steer clear of this type of advisors. First, the proof is in the pudding. The numbers have repeatedly shown that a very small minority of people are able to outperform the market on a regular basis. If your financial advisor’s sole value proposition is to generate higher returns by trying to outperform the market, he might be encouraged to take extra risks just to keep up.
The second thing we should look at is the possibility of long-term planning. A solid and experienced financial planner knows that there can be major rewards for comprehensive planning instead of constantly tweaking investments. Look for a financial advisor who has a long-range plan that could help you incorporate all aspects of your financial life in a comprehensive and holistic way and turn them into a game plan rather than being focused on one area of personal finance.
4. Titles don’t mean much.
What type of professional are you supposed to hire? Do you need a financial advisor or a financial planner? Perhaps you need a wealth manager or a financial consultant to handle your investment needs. Don’t let all of the titles and fancy jargon confuse you. Titles in the financial industry are not well regulated, though a new proposal on the table called “Regulation Best Interest” might change that, we hope. Be sure to ask exactly what type of services your financial professional offers to get a better idea of what to expect from your meetings.
Be aware that it isn’t uncommon to see an insurance agency without a lot of involvement on the financial planning side to also call themselves a financial planner. In reality, they primarily sell insurance.
Hiring a financial advisor can feel like a daunting task, but it doesn’t have to rule your life. Keep these four tips in mind when you call around, and you’ll have better odds of finding the right advisor for you. Your financial future really does depend on the investments you make right now. Once you know what to look for, you can hire your next financial advisor without hesitancy.