Looking to hire your first financial advisor? Considering “breaking up” with your current one and moving on to greener pastures?
Before you move forward, make sure you avoid these 7 common mistakes.
1. Forgetting that it’s your money
When you first meet with a financial advisor, it’s not uncommon to feel intimidated. You’re meeting with an expert about something you might not know a lot about. But, no matter what knowledge or financial prowess you possess (or don’t possess), never forget that it’s your money, and your financial advisor works for you.
Never be ashamed, embarrassed, or afraid to ask questions and have a thorough understanding of what’s happening with your money.
A financial advisor has to earn your business by teaching you about your finances. They should never intimidate you, bully you, or talk in circles.
2. Investing in things you don’t understand
There are a lot of financial instruments out there, loaded with abbreviations and complex concepts. There are new asset classes, new companies, and new industries being introduced regularly.
You might not understand them all (or even a few of them), but you should develop a basic understanding of them before you invest.
Not having an understanding of what your financial advisor is doing is what led thousands of individuals and investment firms to lose $65 billion disappear under Bernie Madoff’s Ponzi scheme.
3. Not learning from your financial investor
You don’t have to be an expert. After all, that’s why you’re working with a financial advisor in the first place! However, you should be able to learn from your advisor. Ask questions and be open to exploring new ideas.
Having an open and honest relationship with your advisor is essential for a long-term, lucrative relationship.
4. Being “sold” by a salesperson
All financial advisors should be personable, knowledgeable, and skilled communicators. That’s a given.
What you should be on the lookout for are advisors that know more about sales tactics than they do about money.
You wouldn’t choose a doctor based on their salesmanship. It would be based on their knowledge, skill, integrity, and patient testimonials. The selection process for a financial advisor should be similar.
5. Choosing an advisor with the wrong specialty or strategy
If you’re nearing retirement, you don’t want a financial advisor that specializes in high-risk investments. It’s important to choose an advisor that is skilled at managing and growing your money in a way that’s consistent with your goals.
On the flip side, if you’re in the family planning phase of your life, or you’re a business owner with a high net worth, you would be wise to avoid a financial advisor whose strength is retirement planning.
Your financial advisor should also have a strategy that’s consistent with yours. This means looking at how aggressive they are, which financial instruments they recommend, and how they diversify portfolios.
There’s nothing wrong with interviewing a number of financial advisors to learn about their strategies, even if they’re different from yours. Just be sure you’re not persuaded by emotion or sales tactics.
6. Not checking references or credentials
No matter how much you click with an advisor, don’t skip the step of calling references and validating the credentials and certificates your planner has.
Google can also be your best friend when it comes to doing your homework. Do a search on your potential advisor’s name and firm. Include words like scam, complaints, and scandal in your search queries as well.
7. Not understanding your fee structure
Know how your financial advisor is getting paid. Their services come at a price, and they’re not doing volunteer work!
Look for advisors that charge a reasonable flat rate. If their compensation is dependent on commissions based on the investments you make, then there’s a conflict of interest. This is because they could steer you toward investments that aren’t in your best interest for the sake of earning a commission.
The Bottom Line: Choosing a financial advisor can be a life-altering decision. You can, of course, switch, but before you do, make sure you understand the terms. There could be contract termination fees and potential tax ramifications for moving your funds between companies.
So, whether this is your first financial advisor or your tenth, keep this checklist in mind. You’ll not only avoid the hassle of switching down the road, but you’ll also be better positioned to avoid trusting your money with someone like a Madoff.
