Hiring someone? Maybe you're bringing in a plumber to look at your pipes, or a painter to put some coats on your house. You won't know really know if it was a good decision until the job is done, but at least you'll know in a matter of hours or days.
If only it worked that way with a financial advisor. If you pick a bad one, you may not realize it for years. If you want to spare your future self a lot of financial heartache, avoid these three common mistakes when selecting a financial advisor.
1. Not doing research on who you're hiring. If you don't know what a no-load fund is, or you hear the word "bond," and immediately think "007," you may assume that any financial advisor who isn't drooling and speaks coherently knows more about money than you do. But you still need to make sure your financial advisor has good credentials and a solid education, says Jamie Hopkins, a professor who teaches classes in retirement, estate planning and life insurance at The American College of Financial Services in Bryn Mawr, Pennsylvania.
"You wouldn't hire a doctor or a lawyer that didn't go to medical school or law school, so why would you hire a financial advisor who didn't get educated in financial planning?" Hopkins asks.
The most prestigious designations -- and there are many that a financial advisor can get -- are the certified financial planner, or CFP, and chartered financial consultant, or ChFC, Hopkins says. Both require extensive training and classes, and if your financial advisor has one or both designations after his or her name, you'll know that this isn't someone who just slapped up a website and decided to call him or herself a financial advisor.
Unless that's what they did. In this day and age, any con man can make himself look professional and stick those designations after his name. Still, do your web research and look for information on the financial advisor you're zeroing in on, if this isn't a referral (and even if it is, a little internet sleuthing wouldn't hurt).
Christine Riordan, president of Adelphi University in Garden City, New York, and someone who has done more than her share of investing over the years, says that if you really want to feel comfortable about who your financial advisor is, there are a few websites to look at:
-- Letsmakeaplan.org. This is a website run by the Certified Financial Planner Board of Standards. Worried that someone isn't really a CFP? Check out the site's search engine. If there have been any disciplinary actions against the individual in question, you'll find them here, Riordan says.
-- Brokercheck.finra.org. This is the Financial Industry Regulatory Authority's website. You can get background information on your financial advisor here.
-- Sec.gov/investor/brokers.htm. This is the website run by the U.S. Securities and Exchange Commission. If you can't find your broker here, you probably should worry.
[See: 10 Money Leaks to Shut Down Now.]
2. You stay with a financial advisor despite a poor rapport. You don't have to go to the movies with your financial advisor and connect on Facebook, but you should feel like he or she respects you. Certainly, your pro should explain his or her advice clearly to you, says Wallis Wilkinson Tsai, a former Goldman Sachs investment banker and then hedge fund manager who now runs a startup, AboveBoardFinancial.com, a website with tools to help people make better financial decisions.
"Any financial advisor who isn't willing to do that hasn't earned a client's business," she says.
Riordan has similar advice. She stresses that communication is crucial.
"You and your advisor need to be able to speak freely and easily and be on the same page about how best to save, invest and grow your money," Riordan says. "Take the time to be comfortable with someone and know that you communicate well with each other before selecting an advisor."
3. You haven't asked your financial advisor how he or she is paid. This may be the hardest thing to do of all, if you're new to hiring a financial advisor. First, it can be an awkward question, perhaps suggesting that you're already wary of your advisor, and secondly, the answer may not do you much good since there isn't much of a consensus on what's best for the consumer.
Financial advisors are generally paid either by commission, or they're fee-based. If you talk to fee-only financial advisors, they'll explain that because they're paid a flat fee for their services, they won't steer you to an investment product that earns a fatter commission than another investment product that may be a better fit for you. That makes sense, and you'll come away convinced that the commission model is a joke.
But industry insiders point out that you can still pay fees to a financial advisor and be given crummy financial advice. That, and there are a lot of regulations in place holding financial advisors and brokers to a fiduciary standard, which means that they have to act in the best interest of their clients.
Regardless, commission-based financial advisors have a lot going for them as well, Hopkins says.
"If you are looking to purchase insurance or an annuity, many of the most qualified advisors with the best products are paid through commissions," he says. "Additionally, commission-based compensation can be a more affordable option for someone who just needs help with a few areas and has limited assets that would not be well-suited for an asset under management or flat-fee model."
Really, Hopkins says, more important than how your advisor is compensated "is the level of the fees charged. So ask your advisor about his or her fees and compare them to others. You need to shop around. Do not go with the first financial advisor that you meet."
His point brings us back to the first point -- research whomever you're hiring. At least do as much diligence as you do for your plumber, your heating and cooling guy, a house painter and so on -- and preferably more. If you don't learn something substantial, you really know nothing about your financial advisor.
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