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Avoiding the Wrong Financial Advisor

It is not easy to find a financial advisor you can trust with your money.  Getting the right person from the start will save you both emotionally and financially.  The whole idea of looking for a financial advisor or beginning a new relationship seems daunting.  Going to the dentist almost seems easier. The key is asking a few crucial questions since not all financial advisors are created equal.  Huge disparity exists between pay structure, level of advice and services.  Financial advisors also vary widely in their education, experience and approach.   Once you filtered through who to avoid, conduct an in-person interview with your short list to assess your chemistry or personal connection.  


Q.  Do you belong to a broker/dealer?

If they have an affiliation with a broker/dealer they are in the business of sales.  Their standard of care to the client is “suitability.” Any investment can be characterized as “suitable” and they work for the brokerage house not you.  The key is to work with an independent (no broker/dealer relationship) advisor who acts as your fiduciary, similar to a CPA or an attorney, who has your best interests first.


Q.  How are you compensated?

Financial advisors are paid in several ways. How they are compensated may affect the advice you receive. A “fee-based” advisor receives compensation from you and from outside sources in the form of commissions, free trips and/or bonuses based on the sale of particular products within your investments. This means they have other incentives, creating conflicts of interest while giving you advice. The key is to only work with “fee-only” advisors.  “Fee-only” advisors charge a percentage fee based off of the assets they manage.  Their interest is to serve your needs, not make sales for a commission. 


Q.  Do you provide financial planning services?  What does your plan look like? Cost?

Many financial advisors say they do financial planning, yet really they just manage your investments.  A financial planner understands the portfolio integration with tax efficiency, risk management, estate planning, college education funding and retirement planning.   They will charge a separate fee for this service.  If they are only charging a percentage to manage the portfolio, the likelihood that they provide comprehensive financial planning services is not high.  The key is to work with a financial planner who understands this integration and can help you avoid retirement tax traps due to poor planning.  


Q.  How long have you been doing this? What credentials do you have?

People can enter the financial services industry with virtually no education or background.  Ask the financial advisor to describe their work experience and how it relates to their current practice. The term “financial advisor/planner” can be used by many financial professionals. The key is the advisor should have at a minimum a CFP (Certified Financial Planner) designation from the CFP Board of Standards or a Master’s Degree in Finance.  


Q.  Who is your 3rd Party Custodian?

A third-party custodian is used to hold your assets, such as Schwab, TD Ameritrade or Fidelity.  They send you a monthly statement and confirm all trades made by your advisor on your behalf.  This 3rd party custodian protects your assets from fraud.  This way the advisors do not co-mingle or handle clients’ checks, deposits or withdrawals directly. Using a custodian not only protects you, but the advisor from fraud by reducing opportunity to have unauthorized movement of assets without your consent. The key is if the advisor manages your money themselves, I suggest you look elsewhere.  


Q.  Have you had any disciplinary actions? 

Financial advisors are regulated by FINRA, the SEC or both. Financial advisors who are disciplined are being held accountable for imprudent advice or abuse.  The key is to visit www.adviserinfo.sec.gov or www.brokercheck.finra.org to check out the advisor’s record.  


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Comment   |  7 years, 5 months ago from Denver, CO