5 Red Flags to Consider When Selecting a Financial Advisor

Over the course of my 20+ years as a financial advisor, one of the questions I find myself most frequently asked by friends and family is what they should look for when considering who to select as their own financial advisor. This is a very important topic. In fact, it is so crucial to get this right, that in our second book, Optimal Financial Health, an entire chapter is dedicated to this very subject.

To help you in your own decision making, here are five critical and timely items to consider both during the selection of, and subsequent ongoing relationship with, a financial advisor.

01. ARE THEY TRANSPARENT ABOUT HOW THEY ARE PAID?

Your advisor should not balk when you ask how they are paid. Financial advisors don’t work for free, and it’s important to understand how yours is paid. In general, if your advisor is paid exclusively or primarily on a commission basis, there’s greater incentive to advocate for themselves rather than for their client. One of the potential unscrupulous behaviors is ‘churning’ whereby the advisor recommends excessive buying and selling of securities which result in a new commission at each transaction.

02. ARE THEY A FIDUCIARY?

The fiduciary standard requires your money steward to hold your assets in trust and manages the assets for your best interests, not their own. Although not a guarantee of bad financial advice, advisors who are not fiduciaries have a strong potential conflict of interest. One thing is certain, you want an advisor who puts your interests ahead of their own.

03. DO THEY PROMISE AN ABNORMALLY HIGH ROI?

Financial markets are volatile. Returns go up and down. The stock market could fall one year only to rebound the next. Bond markets have similar outcomes. Although there are fixed income products, such as certificates of deposit and annuities, with promised rates of return, if the advisor promises a higher than the market rate of return, be wary. Risk and return are inversely correlated. In order to have an opportunity for a higher rate of return, you need to take on greater risk. Be skeptical when you’re offered a secure AND high rate of return.

04. THERE IS MORE THAN JUST PEDIGREE

There are advisors with degrees from prestigious universities which by no means indicate that they are experts or should they be trusted. There may also be scammers in your church, alumni organization, or neighborhood group. Affiliation doesn’t equal trust. There are a number of professional designations that can assist with credibility and professionalism. Are they independent or beholden to a particular investment or insurance company? Do they specialize in your unique situation?

05. LOGISTICAL CONSIDERATIONS

You should never be asked to write a check payable directly and personally to your advisor. Rather, the checks should be written to a third party trust company, transfer agency or firm. Understand proper investment management procedures. Are you receiving monthly statements? Does your advisor take the time to explain the statements?  Do the firm’s investment communications include the name of investments in the account, the yield of investments, market value and the cost basis of the investments?

THE BOTTOM LINE

You work hard for your money and it’s ultimately your responsibility for vetting the financial professional. There is no ‘guaranteed’ perfect investment or financial advisor. Use good judgment and practice due diligence when contracting with professional money managers and advisors.

If you’re considering working with us here at Mosaic, we invite you to learn more about who we serve and how we help them. You can also contact us with any questions you have.

 

Securities and investment advisory services offered through NEXT Financial Group, Inc. Member FINRA/SIPC. None of the named entities are affiliates of NEXT Financial Group, Inc. Neither NEXT Financial Group nor its Representatives give tax or legal advice.