7 Mistakes You Make While Hiring a Financial Advisor And How To Avoid Them
There are some areas in life that you can handle yourself. However, in some other, more complex spaces, it is always better to rely on professional advice. Health, wealth management, and legal matters are some significant areas, where professional advice is of utmost value. Money matters can get complicated. Especially with changing laws, a wide-array of fiscal products, variety of investment options, etc. Hence, it is always better to go by what the experts say rather than rely on your limited monetary know-how. But how do you ensure that you have hired a suitable advisor?
Hiring a financial guide in the modern day is not a difficult task. However, you must take an active part in the process and choose a consultant that can efficiently manage your wealth, bring you peace of mind, and reduce your monetary stress.
Here are some common mistakes that people make while hiring a financial advisor:
1. Not understanding the pay structure of the expert
Financial advisors are compensated in a variety of ways. These can include commission-based pays, fixed fees, or a combination of the two. This compensation is different from the investment expense that you incur. It is essential to know how your financial advisor is paid and what comprises your total investment expenditure. It is advisable to not merely opt for the least expensive consultant but choose the one that best suits your needs. In monetary matters, quality is of immense importance.
So, when hiring an expert, remember to ask if they earn a commission on the products that they suggest or the investments you make. In case the monetary advisor is working on a commission, understand that there could be a conflict of interest. But this does not imply that all commission-based specialists will work against your advantage. However, the probability of such financial consultants not working in your favor is too high. Your motto should ideally be to look for a financial advisor who is a fiduciary. Generally, fee-only consultants follow a fiduciary standard. When a professional is governed by a fiduciary duty, it implies that they will make decisions and offer advice, to best suit your life goals. In such a case, a fee-based advisor can be more expensive than a commission-based one. But if you evaluate the loss of opportunities in the latter, you would be able to choose well.
2. Failing to do an in-depth background check
Another common mistake that most people make while hiring a financial advisor is going all-in without verifying the person. These consultants hold the ripcord of your finances. So, it is advisable to be patient while selecting your financial advisor. Hire a monetary professional only after you are sure of their skills, expertise, educational background, and past-records.
It is advisable to engage with a counselor registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator. You can also use trusted sources like WiserAdvisor’s advisor match tool, Garret Planning Network, National Association of Personal Financial Advisors (NAFPA), Financial Planning Association, the Certified Financial Planners Board, etc. to find a skilled monetary consultant. Online tools like WiserAdvisor’s advisor match tool deploy complex algorithms to find pre-screened advisors in your area. The tool chooses professionals after an exhaustive analysis of their experience, compensation arrangement, licensing, and disclosures. You can also seek referrals from friends, colleagues, and family. But even after you find a match, it is beneficial to conduct your assessment of the consultant’s certifications and licenses, services, types of clients, industry expertise, communication mediums, and frequency, etc. Ideally, you can hire a consultant who is either a Certified Financial Planner (CFP), Chartered Financial Consultant (CFC), or an Accredited Investment Fiduciary (AIF).
3. Selecting an expert who specializes in only a specific area
This mistake can often put a lot at stake. It is good to hire someone who works to get the highest possible returns for your investments. However, financial planning is not limited to one particular area. It is more holistic. Thus, your advisor should be able to advise you on everything. This can include taxation, estate planning, investment portfolio, insurance, retirement planning, cash management, and more. They should have the skill to help plan your long-term and short-term goals, and assist you in modifying them with time.
4. Choosing the first expert you meet
Hiring a financial advisor is not that easy. It requires patience, in-depth research, and extensive time and attention. You might have to interview or meet many professionals to finally find the one that adequately fulfills your requirements. Thus, opt for someone you can completely trust with your money. On average, you should at least assess three advisors before you make the final choice. Remember to ask them the right questions about their licenses, pay structure, knowledge, etc. This process will not only help you gather information, but also assess your compatibility with the expert.
5. Trusting mentors who guarantee returns or make sky-high claims
When hiring a financial advisor, one thing you must not fall prey to is flamboyant declarations. It is not advisable to engage with a person who promises guaranteed returns or claims to outperform a declining market. It is important to remember that such affirmations are hollow, and market performance cannot be guaranteed unless you are investing in a certificate of deposit (CD). It is not in your favor to work with someone who advertises claims and has little theory or realistic examples to substantiate their assertions.
6. Choosing an advisor based on the brand name
Brands do convey trust. And often, it would be luring for you to entrust your monetary matters with someone who represents a reputed name. However, that would not always be ideal for your financial situation. Consultants might appear qualified due to their association with a brand name, but it does not guarantee that they will suit your purpose. That said, larger firms do offer better tools, reliable information, stability, and other advantages. But they also charge high fees. Keeping all such criteria in mind, choose a guide that is an ideal fit, regardless of the brand they represent.
7. Engaging with an individual rather than a team
Often people end up engaging with experts who appear competent and work independently. While that might work for some investors, you should be cautious about judging if the strategy would be advantageous for you or not. It is advisable to engage with an advisor who is a part of a team, rather than opt for someone who works in a solo capacity. Teams usually have backups. Thus, your financial planning will not suffer because of the professional’s retirement, job change, ill-health, or any other mishappening. Moreover, team advisors generally have a varied experience rather than expertise in only one specialized stream.
To sum it up
By cautiously avoiding these mistakes, it is likely that you will find a Professional Financial Advisors who is experienced, qualified, a fiduciary, and works to serve your best interest. Keep in mind to invest time and have patience while finding the right advisory match as your future depends on it.