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7 Mistakes People Make When Hiring a Financial Advisor

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Financial planning is an important process in helping ensure you are financially comfortable in the future. It requires considerable financial knowledge and insight, not to mention having to keep yourself updated with the latest developments in the world of finance to make informed decisions. Even if you wish to take an active part in your financial planning, you may not have sufficient time to manage your finances yourself. Here is where a financial advisor can prove to be of great help. A financial advisor can guide you on how to optimally manage your money to achieve your financial dreams and goals. The advisor can also explain and help you understand the changing fiscal laws, introduce you to suitable financial products, how to minimize taxes, help build a retirement corpus, and much more.

An advisor's help can prove useful in protecting and growing your wealth as well. Investors should consider hiring a financial advisor to help with investment planning, retirement planning, wealth management, estate planning, and more. You will also be able to plan your retirement better with the help of an advisor. It has been observed that people who hire financial advisors feel more at ease about their money and also end up with approximately 15% more funds for retirement.

If you are an investor interested in hiring a financial advisor but are unsure of how to find and choose the most suitable advisor for your needs, read on to know some mistakes you can avoid making in your advisor hiring process:

What are some of the common mistakes made by investors when hiring a financial advisor?

1. Not knowing whether the advisor is a fiduciary or not

A fiduciary is a financial professional who is legally and ethically obligated to work towards the best interest of their clients. Fiduciary financial advisors are considered trustworthy as they avoid any potential conflict of interest. A non-fiduciary advisor might serve his own self-interests, such as marketing a particular financial product to earn commissions or profiting from higher fees at the cost of the client's benefit. Even though the majority of the financial advisors are bound by the suitability standard meaning they should offer recommendations that are suitable to the client's portfolio, there is still space for conflicts of interest. Hence, you should enquire if your advisor is a fiduciary and then make a decision to hire them or not. 

2. Not carrying out thorough research about the advisor’s credentials, fee structure, etc.

One should avoid falling into the trap of hiring the first advisor that they come across. Searching for a financial advisor takes a lot of time and effort and one should ensure that they carry out thorough research on different advisors and compare them according to their pros and cons. Doing so will help you choose a suitable advisor. If you avoid doing this, you might end up choosing an advisor who may not be the right fit for your financial needs.

You should set up a meeting with a few advisors and ask them questions about their compensation structure, how they deal with clients similar to you, and more. You should then compare them according to their responses and narrow down on those who seem in line with your unique financial goals.

3. Being unaware of the specialization of the advisor

Different financial advisors may have specialized knowledge in different fields of financial planning. Some might give advice related to retirement planning, while others might help you out with estate planning. You should be aware of a particular financial advisor's strong and weak areas before hiring him to ensure he can give proper advice concerning your financial needs.

4. Picking an advisor with an incompatible investment strategy

Every advisor applies a different approach to their clients' problems. Some advisors might also be more experienced in handling a client’s needs related to risk tolerance, future goals ,etc. A few advisors might have a conservative approach towards investments and recommend investing in stable income assets, whereas others might have an aggressive strategy towards gaining returns.

Thus, it is important to ensure that an advisor's strategy is compatible with your individual preferences. For instance, you might not get the desired results if you are relatively risk-tolerant and expect high returns on your portfolio, but your advisor has a conservative approach.

5. Not checking the advisor’s credentials

To qualify to give investment advice to people, a financial advisor needs to pass specific exams. These exams require rigorous studies and represent an advisor's knowledge and ethical code of conduct. The advisory tests include Series 66, 65, or Series 7. Some advisors may also wish to further enhance their credentials by pursuing the Certified Financial Planner or CFP Certification. It would help if you asked your advisor about his credentials to get an idea about his skillset. You may become a victim of fraud if you fail to verify the credentials of your advisor.

6. Not knowing the financial advisor’s compensation structure

There are various forms of fee structure that financial advisors adopt in the market. Some earn their income through a fee-only structure wherein an hourly fee or a percentage-based fee (percentage equal to the amount of investments handled/managed) is charged. Others might get their earnings from commissions earned by selling various financial products to their clients. Some might also get their income from a combination of charging both fees and commission from the client. You need to understand how your potential advisor earns his income.

If he earns a commission-based income, there is a high probability that he might recommend particular investment vehicles or products for his gain. Such recommendations may not be in your best interests.

7. Hiring an advisor solely based on past performance

The records of a financial advisor may show impressive returns on investment portfolios of clients, but that does not necessarily guarantee that you should hire the advisor. A financial advisor is expected to provide a holistic approach to the client to boost their finances. Thus, an advisor who is only concerned with current gains might not have the ability to look at the big picture. Thus, you should have a one–on–one conversation with your potential advisor to determine his strategy and approach towards your financial goals.

To summarize

Choosing the right financial advisor may be one of the most important decisions you make in your life. Be mindful of all the above-mentioned common mistakes investors commit while choosing a financial advisor. Remember that a financial manager is not simply a money manager but a guide to help you achieve your long-term life goals like retirement, funding education and more.

If you’re looking for a financial advisor and are unsure of where to start, use the free advisor match tool and get connected with an experienced and certified financial advisor who will be able to guide you effectively and help you grow and manage your finances. Answer a few basic questions about yourself, and get matched with 1-3 financial advisors that may be able to help you.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.