Can You Trust Your Financial Advisor?
24th May 2021
Financial Advisor Insights
10 Min Read
Earning money is tough. Right from the time a child is born, their entire life is focused on performing well, academically or otherwise, so that they can be successful. This success is more often than not, measured in terms of money more than anything else. Whether it is choosing the right school or college, the sole purpose is always to create a source of high income eventually. People work extremely hard in their lives to ensure that they can live a financially secure life. This hard work is not just limited to your job or business, it also entails saving, investing, and spending your hard earned money wisely. To maximize these objectives, it may help to consult a financial advisor to create a plan so you can achieve your financial goals.
A financial advisor can help you multiply your money in various ways. These professionals can assist you on matters of budgeting, saving, investing, portfolio management, retirement planning, estate planning, education planning, etc. The financial advisor can also help with diverse money matters that can not only impact you and your standard of living but also that of your spouse, children, and future generations. In spite of the financial advisor playing a crucial role in your finances, most people worry if they can truly trust them.
If you too are worried if you can trust your financial advisor, here are some things you must know.
How to know if you can trust your financial advisor
To be certain that you and your financial advisor are on the same page, you should look for the following signs:
- Your financial advisor communicates with you openly: Communication is an important aspect of your relationship with your financial advisor. The more you communicate, the better it can be. Regular communication ensures that you and your financial advisor are in complete agreement, your goals and future objectives are clearly conveyed to the professional, and they understand the level of risk you are comfortable with and the kind of investments you would like to add to your portfolio. This helps them chart a suitable financial plan for you. If your financial advisor encourages open and honest communication with no judgments involved, you should take it as a good sign. This means that they are willing to get to know you and your future plans and are open to suggestions, feedback, and other ways to ensure a fruitful professional association.
- You have a clear idea of the costs involved: Investing can come with several costs. These can include expense ratios, fund management fees, advisor charges, annual fees, trading commissions, transaction fees, and a lot more. While some of these costs are inevitable, others can be avoided or reduced by tactful strategies. Regardless of how much money you pay towards these costs, the important thing is to always know what they are and when they are being charged. If your financial advisor is transparent about these costs and is willing to discuss them with you, you have little to worry about. However, if your financial advisor is not ready to explain what these costs are, it may be a cause of concern. With so many hidden costs, sometimes a fraudulent financial advisor may try to con you and feign innocence. You need to be vigilant and do some research on your own as well on the types of investments in your portfolio. Do not let your financial advisor take all the decisions on your behalf. Be involved and read up on the investment documents that state the charges involved carefully. The better informed you are, the lower are the chances of being cheated.
- Your financial advisor schedules frequent meetings with you: Frequent meetings can help you understand where your money is being invested, how it is performing, and what should be the next course of action. Apart from clearly communicating about your risk appetite, future goals, and timelines, frequent meetings are also essential to track performance. If the financial advisor is keen on arranging face to face meetings (virtual or physical), it implies that they are interested in sharing how your investments are faring with you. Meetings are also a good way to see if there are any changes required or any additions or subtractions to be made. Sometimes a change in your personal or professional life, such as changing your job or getting married can call for a change in your investment strategy. A financial advisor can get to know about these changes only if they meet you often. As a client, you may not realize how your life stage impacts your investments, but a financial advisor can.
- Your financial advisor tries to educate you: The job of a good financial advisor is not only to assist you but also to guide and educate you along the way. Their job is not only to point out a certain investment option but also to educate you about how the investment works and how it can benefit you. A reliable financial advisor will try to keep you informed of the various occurrences in the market and how you can navigate your way around them. They will be more focused on making you understand how you can manage and invest your money rather than just directing you towards what to do. This way, you know exactly where your money is being invested and you can make informed decisions on how to proceed in a given situation.
When should you not trust your financial advisor
The following signs can point towards an unreliable financial advisor. If you find these, you should terminate your contract and look for another financial advisor.
- You do not understand the charges on your account: If you do not understand the charges on your account or what they correspond to, it may be time to dig further. Some financial advisors may trade excessively through your account just to generate enough commissions. Also known as churning, this may happen if you pay your financial advisor a commission based on the investments they handle. However, if you adopt a fixed fee or flat fee per hour module, the chances of being scammed could be less. Either way, it is important to be cautious and look for any unidentified or unauthorized transactions. Also, pay attention to the reward and the costs involved. If you are earning less than the expenses incurred, the financial advisor may be operating from an ulterior motive.
- You find investments that you never approved of: Some investors leave everything up to their financial advisor due to lack of knowledge or time. In these cases, the financial advisor may misuse your account to their advantage. If the financial advisor is driven by self-profit, they are likely to select investments where they can earn large amounts of commission. This may or may not benefit you. A healthy financial advisor and client relationship is one where the professional discusses investment options with you before investing your money. Sometimes financial advisors may try to push a new product to you that may not be suited to your goals. Make sure you are wary of these situations. Intervene whenever you are not comfortable with the financial advisor’s suggestions. Lastly, do not leave everything up to them and be as involved as you can.
- Your financial advisor does not remember your goals: Your investment strategy is based entirely on your goals. In fact, one way to ensure that you earn high returns is to invest in goal based products. However, if your financial advisor does not remember your goals, their advice may not work in your favor. An incompetent financial advisor may draft a general plan for all their clients that can lack merit when it comes to individual goals. Hence, a great way to test your financial advisor is to see if they remember your goals or not and how often they bring them up in your meetings. If the financial advisor constantly refers to your goals while recommending new investment options or strategies, it is a clear sign that they are working towards your goals and not their own. However, if you see a similar pattern of investments despite changes in your personal or professional life, and your future goals, it may be time to change your financial advisor.
What can you do to ensure that you hire a trustworthy financial advisor
Here are some things you can do to make sure that the financial advisor you hire is trustworthy:
- Hire a fiduciary: Fiduciary duty legally binds an individual to make decisions based on the client’s interest. All decisions are made based on the interests of the client and how it benefits them rather than the professionals themselves. Hiring a fiduciary financial advisor can help you ensure complete transparency and accuracy as these professionals are legally obligated to act in a manner that profits you. So, look for a financial advisor registered with the U.S. Securities and Exchange Commission (SEC). If the fiduciary financial advisor does not work in your favor, you can always take legal action against them.
- Check the feedback of other customers: Thanks to online reviews, it has become quite simple to check customer feedback. Customer feedback can help you determine if the financial advisor is right for you or not. Not only do reviews help you understand the professional’s performance but also their temperament and attitude that can help you in deciphering whether or not the advisor is suitable for your needs. For instance, a financial advisor may be good at delivering performance but not great at communicating. This may be hard for clients who are not well versed in the financial world and require regular updates on their investments.
- Pick reputable financial advising firms: Hiring a financial advisor from a reputed and well known advising firm can also help you be sure of the professional’s credibility. For instance, you can check WiserAdvisor’s Advisor Match Tool, or the National Association of Personal Financial Advisors (NAFPA), etc. These platforms ensure connecting you with vetted professionals who can meet your financial needs. Moreover, there is more accountability as advising firms only hire financial advisors with proper certifications and educational qualifications. The prices are also regulated to ensure that you are not overcharged or wrongfully charged. Additionally, you can expect frequent communications, meetings and periodic assessment of your investments and their performance. This instills more confidence and keeps you up to date with how your portfolio is performing. In case of any disappointments, you can always request to make changes.
- Be involved and educate yourself about investing: Since you work so hard to earn money, you should be involved in how you invest your money too. A lot of people continue to fear the investing world and do not bother to educate themselves on it. This creates an opportunity for people to take advantage of you. Being up to date with the market and reading up on different investments will ensure that nobody is able to dupe or scam you. It also makes you better equipped to make decisions. So, if your financial advisor is not making a decision in your favor, you can call them out instantly. The existing challenge is that investors are not well informed to know when they are being exploited since they lack the know-how. So, read financial journals, talk to your peers, and pay attention to how your investments perform to gain more knowledge on the topic.
To sum it up
There are all kinds of advisors – good and bad. You do not have to be wary of every financial advisor. Remember that these professionals have helped several people build fortunes and achieve their financial goals. However, having said that, it is imperative to hire a financial advisor after closely scrutinizing their merits, qualifications, certifications, and experience. Moreover, try to be as involved in investment decisions as you can and communicate as openly as you can. This will allow you to get to know your financial advisor better and also reduce chances of investment errors.
If you are looking for a trustworthy financial advisor, you can use our free advisor match tool to compare and connect with upto 3 vetted financial advisors. Choose the right financial advisor for you. One that you can trust.