There are several reasons why an advisor may be wrong for you, ranging from the inappropriate to the criminal. Finding a great financial advisor is important because of the critical role they play in your ability to reach your goals, whether they be retiring with dignity, making a larger charitable contribution to the world around you, buying a house, putting your kids through college, and beyond.
As a financial planner in Davis County, Utah serving clients across the country, this is a decision we encourage any prospective client who contacts us to take seriously, with a high degree of objectivity, awareness, and logic.
Here are the common traps we see individuals falling into when they choose a financial advisor. We hope our guidance may help you make the right decision.
Types of financial advisors to avoid
Generally, advisors you’d like to avoid fall into one (or more) of the following categories:
- Advisors who, despite a well-meaning attitude, don’t seem to get things right. Some may not have the right experience or education, while others may have a philosophy that doesn’t match up with yours. These advisors may give you the time and attention you deserve, but their results are lackluster or worse.
- Advisors who work on commissions. These advisors may constantly press you to move from one investment to another (known as churning) and/or to contribute every spare dime you have to your investments. Churning can be lucrative for advisors because they charge for each transaction.
- Advisors who are simply criminals who direct clients’ money into shady companies they controlled or outright steal money from their clients
Naturally, you want to avoid all these advisors. But, because there is no requirement for someone to use the title “financial advisor,” how can you tell a good financial advisor from a bad one?
Below are 7 signs that should make you wary that a prospective advisor is bad news.
1. “Hurry! Act Fast”
A big red flag is advice to act quickly before the opportunity disappears. High pressure or using fear to get you to make a quick decision is a sales tactic. If they are using high pressure sales, they may not have your best interest at heart. And they might just be a good salesperson, not a quality financial planner. If an advisor encourages you to make an immediate, emotional decision, walk away!
2. “Guaranteed” High Returns
This type of advisor is all too willing to boast about returns that you are guaranteed to enjoy. These advisors may try to impress you with a wall-full of diplomas and certificates. They then let you in on “a secret” or two that they reserve for their “best clients.” (Who exactly are their other clients?) They may even have fancy presentation materials that supposedly prove their assertions. If it seems too good to be true, it probably is. In order to get returns, you must be willing to take on some risk or pay some sort of cost. If they aren’t properly educating you on the risks and costs associated with the returns, there is something missing from their fancy presentation.
3. More Concierge Than Advisor
Beware of advisors who tout all the wonderful services and personal attention they give you. It might be a cover-up for poor returns. Naturally, you want an advisor to be courteous and attentive, but you should expect no less, given you are paying for the service. What you deserve is an advisor who has a professional work ethic and can show you how they will add value to your financial plan.
4. How Do They Get Paid?
When advisors push only mutual funds or annuities that pay them compensation or the same investments for every client, this could be a red flag. The advisor may have a quota to sell a certain product or get paid more on one type of investment than another, even if it is not in the best interest of the client. Insist on understanding how your financial advisor gets paid, including all the costs and fees of your investments – and get it in writing. Ask about commission costs and 12b-1 fees or other sales-based fees in investments like mutual funds. And ask about custodial and trading fees.
5. Split Personalities
The advisor you choose to work with should be a full-time fiduciary, meaning they put your interests first and act exclusively in your best interests. This is the highest standard of care. A fiduciary will sacrifice fees in order to put clients in the most appropriate investments. Advisors not held to a fiduciary standard may be more interested in finding you “suitable” investments that are more expensive. It’s not always a problem, but you will want to at least evaluate it carefully.
6. One-Size-Fits-All Solutions
Advisors who offer only cookie-cutter or one-size-fits-all plans aren’t really doing much for you. This can arise when an advisor is compensated by selling a plan, meaning putting you in preselected investments that pay the advisor high commissions. You don’t need an advisor to be a stock-picker, but you should demand attention to your specific circumstances and needs. Part of your interaction with an advisor should be agreement on your goals and how success will be measured.
7. No Credentials
A good financial advisor should have credentials besides just the title of financial advisor. As stated earlier, there is no requirement to use the term “financial advisor.” Look for an advisor with the CFP® or the CERTIFIED FINANCIAL PLANNER™ designation. This designation means they have experience and education in financial planning. And they are held to a high standard of ethics. Many designations require advisor to get continuing education and stay up to date on new research and changing tax laws. Without some evidence of training and education, you may just be meeting with a smooth-talking salesperson.
Finding a Good Financial Advisor
There are many ways a good financial advisor can set up their firm to provide quality service. The advisors practice under these standards:
- Independent
- Fee-only
- Fiduciary
What does this mean?
A financial advisor who can offer independent financial advice is not directed by shareholders or a far-removed corporate office. They are not tied to proprietary production or minimum production requirements and can offer a broad range of investment options.
Fee-only financial advisors are paid only by their clients, removing even the perception of a conflict of interest. They are not paid by commission or outside outfits, meaning their compensation depends on the job provided to their clients.
A fiduciary financial advisor follows the highest standard in the financial services industry, with a legal obligation to put clients’ best interest first. Other advisors are only held to a suitable standard, meaning they can recommend a product that may have a cheaper, better alternative, as long as it’s suitable for a client’s situation.
For more on what this type of service looks like, click here.
The Takeaway
There are a thousand ways to find a financial advisor who is wrong for you. You’ve worked hard to accumulate your money, so make sure you work just as hard to find the right financial advisor for you. Don’t just type in “financial advisor near me” into a search bar and go with the first name that pops up. Try “fiduciary retirement planner near me” or “Certified Financial Planner Utah,” and then follow up. Ask questions. Get the answers in writing.
At Rock House Financial, a fee-only financial advisor in Davis County, Utah, we are charitable giving tax mitigation specialists. We work with families, business owners, and individuals who wants to make an impact through giving.
“Have you made your greatest contribution yet?”
Don’t just hope – get the answers you need about how to mitigate taxes and achieve your financial goals.
If you’d like to explore if we could be of help to you regarding how your financial affairs (including the implications of your estate planning on your finances), please schedule a time to speak.
Disclosures
Rock House Financial (RH Advisors) throughout this website has provided links to various other websites. While the firm believes this information to be reasonably reliable, current and valuable to its clients, The firm provides these links on a strictly informational basis only and cannot be held liable for the accuracy, time sensitive nature, or viability of any information shown on these sites.
The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.
