We all want what's best for our finances, but sometimes it's tough to tell whether you're making the right decisions. Are you saving enough for retirement? Are you investing in the right places? There are countless questions you may be asking yourself as you decide where to put your money.
This is when some people turn to financial advisers for help. Although it is possible to manage your money on your own, not everybody wants to do it. Sometimes it's just easier and more convenient to leave your finances in the hands of a professional.
If you choose to enlist the help of a financial adviser, you would hope that they have your best interests at heart. But research shows that's not always the case, and it's costing Americans billions of dollars per year.
Why your adviser may not be offering the best advice
Your financial adviser's job is to provide advice that helps you make good investment decisions. But sometimes advisers are provided with incentives to sell certain products or investments, leading them to offer you advice that is more beneficial to them than to you.
A conflict of interest can be incredibly harmful to investors. The average saver who has received conflicted advice earns returns that are around 1 percentage point lower per year compared to those who receive advice that's in their best interest, according to a 2015 report released by the White House. That amounts to a total of around $17 billion in lost potential earnings each year, the report revealed.
One of the reasons conflicted advice is so dangerous is that it can be difficult to spot. Your adviser would never tell you that you're receiving subpar advice so that they can pocket some extra cash, and because finance is a topic that can already be difficult to understand, you may not know whether the advice you're receiving is good or not.
Even if you're not necessarily receiving bad advice, there's a chance you could be earning higher returns on your investments. That can potentially add up to tens of thousands of dollars or more over a lifetime, so it's worthwhile to make sure your adviser is working in your best interest.
How to tell whether your adviser is right for you
The first step to making sure you're receiving the best advice is to think about whether you even need an adviser. If your finances are fairly simple and straightforward, you may not need a professional to tell you how to manage your money. Many advisers may tell you that you need professional advice regardless of what your financial situation looks like, but when you have access to a wealth of free advice online, you can save money while still making good investment decisions by handling your finances yourself.
On the other hand, if your finances are complex or you simply don't like managing your money, you may decide to hire an adviser. If that's the case, there are a few things to do before you hire anyone.
Be sure to check your adviser's credentials before you hire them. Nearly anyone can call themselves a financial adviser or planner, but only certified financial planners (CFPs) have to pass exhaustive exams to earn their titles, and they are also held to stringent standards in order to maintain their certifications. That's not to say that all CFPs are inherently better than the average adviser, but keep qualifications in the back of your mind as you're shopping around.
Another factor to consider is how the adviser is paid. In general, there are two main types of advisers: commission-based and fee-based. Commission-based advisers earn money when they sell certain types of investments or products, which may make it difficult to tell whether their advice is in your best interest. Fee-based advisers, on the other hand, are either paid by the hour or take a percentage of the assets they're managing. So if your adviser is managing your retirement fund worth $100,000 and charges a 1% annual fee, you're paying $1,000 per year in fees.
This doesn't necessarily mean fee-based advisers are always better than commission-based advisers, and one advantage of commission-based professionals is that they're often less expensive than those who charge fees. However, it's important to ask a lot of questions before you hire a commission-based adviser to make sure you're receiving unbiased advice. And if something doesn't feel right, go with your gut and keep shopping around.
If you choose to hire a financial adviser to help you make the best decisions for your money, you should be able to trust that that person is doing what's right for your situation. Doing your due diligence before you hire someone can ensure you're putting your finances in the right hands.