By Taylor Schulte
Did you know anyone can call themselves a financial advisor? Or a financial planner, a wealth manager, an investment manager … the list goes on. Believe it or not, these titles have no legal or regulatory meaning.
In fact, you could call yourself a wealth manager right now if you wanted to. That’s just one reason to find a trained, experienced and legitimate advisor who works in your best interest at all times. It’s hard to spot a real financial planner among salespeople and agents who work on commission and aren’t legally required to put your interests ahead of their own. It falls on us to understand what to look for when hiring a financial planner — and what mistakes to avoid. Here are three big mistakes to steer clear of:
1. Advisors who are not a fiduciary all the time: One of the most important questions that you can ask any financial professional is, “Are you a fiduciary?” This means that they’re required to put your interests ahead of their own. Unfortunately, finding a true fiduciary isn’t always as easy as asking this question because some advisors act as a fiduciary … sometimes. These advisors also operate under the “suitability” standard, meaning they only need to prove that a product is suitable for you. They don’t need to take into consideration fees, quality, or expected investment return of their recommendation. Just about every big brokerage firm you know by name operates under this suitability standard. They also tend to get paid on commission, creating massive conflicts of interest. You don’t want to hire an advisor unless they act as your fiduciary 100 percent of the time. Get crystal clear on this by requesting they sign a fiduciary oath on your behalf. If they refuse to sign, keep looking.
2. Not working with a CFP® professional: Remember how anyone can call themselves a “financial advisor” or a “financial planner”? Those terms aren’t regulated. But other designations are. Search for financial advisors that have the CERTIFIED FINANCIAL PLANNERTM (CFP®) designation. Only about 25 percent of financial advisors are CFP® professionals, and there’s a reason for that: CFP® board requirements extremely stringent. A college degree is also a requirement.
CFP® professionals are trained to help you plan around every aspect of your financial life with a holistic, comprehensive approach. Other advisors often have much less expertise. They simply don’t have the same level of rigorous training and education.
3. Believing advisors promising to “beat” the market: Beware of any financial advisor who tells you this. It’s just about impossible for anyone to consistently outperform market indexes. But it is really easy for financial advisors to create a “back test” to show you what their portfolio could have done in the past. This allows them to cherry-pick the best mutual funds and say, “Look what we would have done for you if you hired us 10 years ago.” But past performance doesn’t guarantee future results. Instead of trying to beat the market, you want an advisor who helps you focus on the things you can control, like fees, asset allocation and location, tax efficiency, risk tolerance, and risk capacity.
Know the other warning signs
There are a lot of financial advisors out there — and when they’re not all created equal; who you choose to work with impacts your ability to reach goals and financial success. Knowing the red flags can help you navigate through a sea of choices and focus on the advisors who truly offer comprehensive planning with advice that’s in your best interest. Want to learn what other mistakes to avoid when hiring an advisor? Download this free guide tinyurl.com/y8brqxsr. To see the original version of this article, visit tinyurl.com/ycqsdd3x.
—Taylor Schulte, CFP, is the CEO of Define Financial and the founder of StayWealthySanDiego.com and is passionate about helping people make smart decisions with their money. He can be reached at 619-577-4002 or firstname.lastname@example.org.