Please ensure Javascript is enabled for purposes of website accessibility

4 Big Mistakes You Might Make When Hiring a Financial Advisor

By Maurie Backman – May 7, 2019 at 8:39AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Steer clear of these -- your money is on the line.

Working with a financial advisor is a good way to increase your chances of meeting your money-related goals. In fact, Americans who work with advisors are more likely to feel financially secure than those who don't. But not all financial advisors are created equal, so if you're going to hire someone to manage your money, you want to get that decision right. Here are a few major mistakes you'll need to avoid when seeking out the right person to guide you financially.

1. Not asking for referrals

You'd ask a neighbor for the name of a solid home contractor, and you'd ask a friend to recommend a pediatrician. So why wouldn't you seek referrals in your search for a financial advisor? By soliciting endorsements, you'll increase your chances of finding someone trustworthy, so one of your first steps in finding an advisor should be to see who the people you know are satisfied with.

Man in suit at laptop sitting next to woman on couch, shaking hands with man in suit, with charts spread out on table in front of them.

IMAGE SOURCE: GETTY IMAGES.

2. Not finding someone who acts as a fiduciary

A financial advisor who acts as a fiduciary must always put his or her clients' best interests first. Many advisors, however, merely conform to the suitability standard, which means that their only obligation is to recommend investments that technically are a reasonable fit for you. Those investments, however, won't necessarily be the most cost-effective, which is why not seeking out a fiduciary could end up being a very expensive mistake.

3. Not inquiring about fees

Financial advisors have to get paid, and usually, they earn money either via commissions or as a percentage of assets under management. The latter arrangement is usually preferable for two reasons: first, because your advisor won't be tempted to recommend bum investments just to get paid, and second, because your advisor's earnings from your account will be linked to its performance. No matter which setup you choose, make sure you understand what fees you'll be charged, and don't hesitate to comparison-shop. An advisor who charges an annual fee of 1.5% of assets under management will cost you more than one who charges 1%.

4. Not vetting credentials

You wouldn't put your health in the hands of someone without a medical license, so the same should hold true for your money -- you want an advisor who's certified to give financial advice. Therefore, be sure to ask about an advisor's credentials before deciding whether to pursue an official relationship. Generally, you'll want someone who's a CFP (certified financial planner) or CFA (chartered financial analyst). These credentials aren't easily earned -- they require a lot of coursework and the passing of exams, which means that if you hire an advisor who has these letters attached to his or her name, you know that advisor has put in the time.

Working with a financial advisor is a smart move, provided you choose the right person for the job. Be sure to avoid the above mistakes when seeking out a financial advisor, and if you're currently working with someone you're not satisfied with, don't hesitate to make a switch. Remember, it's your money at stake, and you can't afford to leave it in the hands of just anyone.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.