Financial advisors can help demystify investing and grow your money more quickly than you could on your own. They could just as easily tank your finances if they don't know what they're doing. Hiring a financial planner is essentially entering into a long-term relationship. Just as you wouldn't accept a marriage proposal from someone on the first date, you shouldn't hand over all of your money to a financial advisor based on some big promises and fancy marketing language.
It's a good idea to explore your options before committing to any advisor. Get a feel for how well their investment strategies mesh with your long-term goals, and be on the lookout for anything that seems suspicious. Here are some of the most common red flags to watch for.
You don't need to have a degree or strong background in finance in order to become a financial advisor. Of course, most firms will require proper licensing and education when hiring advisors, so you probably won't be getting advice from Joe Schmo who doesn't know the difference between a stock and a bond.
But that doesn't mean that one financial planner is as good as the next. If an advisor is having trouble explaining concepts to you or they have to get back to you with answers to most of your questions, that could be a sign that you're dealing with someone who doesn't know what they're talking about.
The best financial planners will have professional certifications like Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), or Chartered Financial Consultant (ChFC). These certifications require advisors to demonstrate their knowledge of important financial and investment concepts. To obtain the certification, they must pass a rigorous exam that often requires months or even years of study. By choosing an advisor who has these credentials, you can feel confident that you're handing your money to someone with the skills to manage it competently.
Lack of transparency
Financial advisors can be paid in several ways. They may charge a flat fee per service, an hourly fee based on how much time they spend managing your money, or a percentage of your total assets. Some may also receive a commission every time they sell a certain product. Regardless of how they're making money, they should make that clear to you up front so you aren't surprised with additional fees down the line.
Ask the advisor about their fees, and don't be afraid to ask questions if there's something you don't understand. If they're hesitant to explain or if you don't understand what they're saying, move on. That could be a sign that they're more interested in making money themselves than in helping you to do so.
It's a good idea to compare fees from multiple financial advisors before you select one anyway so you can make sure the fees you're being charged are fair compared to the rest of the industry.
Too full of themselves
A good financial advisor should begin by asking you about your needs and goals so that they can assess which would be the right investment products and strategies for you. If they begin by making outrageous claims about their abilities and talking up specific products, that tells you that they're more interested in their own bottom line than yours.
Contrary to popular belief, not all financial advisors are actually required to act in the best interests of their clients. For some, it essentially all comes down to the honor system, and some advisors who are paid on commission aren't always the most honorable. They may attempt to convince you that a certain product is right for you when, in fact, that may not be true. What they're not telling you is that they're going to get a nice payout for spending your money. If this worries you, you should choose a fee-only financial advisor that doesn't accept commissions. That way, you don't have to worry about any conflict of interest.
Too busy to meet
Some financial advisors only meet with you once a year to go over how your portfolio is doing. This may not be a problem if you're very hands-off and comfortable with your advisor's strategy. But if you want to keep a closer eye on your investments, you should choose an advisor who is willing to meet with you more frequently.
Ask about how often you can meet, and make sure that the advisor accepts email and phone calls between meetings. That way, if you run into a question or you decide you want to adjust your investment strategy, you can do so without waiting until the next time you meet face to face.
Choosing the right financial planner can be challenging, but it's crucial if you want your money managed correctly. By watching out for the four red flags listed above, you can avoid unscrupulous advisors who are more interested in their money than yours.