6 Mistakes to Avoid when Hiring an Advisor

Matthew Unger |

If you’re ready to start saving towards your financial goals, or you're transitioning into or nearing retirement you may want to consider hiring a financial advisor to guide you through the maze. While robo-advisors are also available to help you with your savings goals, they are best suited for those just starting out, or for those with limited funds to invest.

But if you want solid, professional advice on where you should put your money, a financial advisor can be the answer. Part counselor, part financial professional, and part advisor, a financial advisor can help you realize your financial goals by explaining the different investment options available, advising you on how much money you should be investing yearly, and how to handle things such as insurance and tax implications as well as guiding you through tough times in the markets and life.

The term financial adviser or financial planner encompasses a variety of financial specialists including certified financial planners, investment advisors, stockbroker, and wealth manager. But not all is built the same. Be sure whoever you chose is a fiduciary. 

Determining your goals can also help you choose the financial professional that’s right for you.

Which leads to the bigger question: How will you know which financial advisor is right for you? You can start by getting recommendations from family, friends, and colleagues. But your work isn’t done by getting a recommendation. You’ll want to set up an initial meeting that functions much like an open Q&A, so you can determine if the fit is right for you. During this process, you’ll want to ask questions. If don't know where to start, here are a 6 mistakes to avoid:

  1. NOT ASKING ABOUT FEES: There is not one set payment structure for financial advisors, so you’ll want to be sure and discuss this when meeting. Don't be shy about this, but also allow your advisor to justify the fee so you can understand how they add value. While most firms typically charge a 1%-2% fee based on the assets they are managing, others may charge a fixed fee, while others charge an hourly rate, while others earn commissions on what they sell you. Yes, some advisors are incentivized to sell you something. Which leads to...
  2. NOT HIRING A FIDUCIARY: Simply stated: unless you are working with a fee-only fiduciary, the financial advisor has a legal obligation to act in their client’s best interests. You may think this is fairly standard, but broker dealers are not required to act in your best interest. Instead are legally able to recommend investments that may be wrong for you but right for them. It’s always best to shop around until you find an investor that acts solely in your best interest. For example, brokers  are not fiduciaries, nor are most of the major warehouses. Some are both, which can create confusion for the client.
  3. NOT ASKING ABOUT OTHER EXPENSES: It costs business to do business. While in a perfect world, all you would pay is advisor fees, you should also be aware that other fees are often involved in investing. Especially insurance products and privately traded REITs and BDCs, even individual stocks and bonds. Depending on the type of investments purchased, you might be surprised that the 1.25% you're paying an advisor actually is well above 2% "all in" when adding fees for expensive products like annuities and certain ETNs.
  4. NOT PROBING DEEP ENOUGH BECAUSE THEY ARE PART OF A WELL-KNOWN BRAND. Just because they sit in a nice office on Park Avenue in New York City, or are part of a large privately owned RIA in a major city does not and should not immediately qualify a firm. Marketing budgets for major US Financial Institutions are in the billions. Just because a firm is "well known" have you done the due diligence on BrokerCheck.com and with the SEC to see the types of negative disclosures on firms? You might be surprised to know that all of the major US warehouses have thousands of disclosures that you need to know. Make sure you're choosing an advisor because they are a good fit, have and adhere to a disciplined strategy, not because of their branding and marketing strategy.
  5. HIRNG AN ADVISOR THAT DOES NOT CUSTODY ASSETS ELSEWHERE. Remember Bernie Madoff? The best way to avoid a "Madoff scenario" is to work with an advisor who custodies assets at a custodian outside of the firm. A custodian is a financial institution that holds securities for clients, rather than keeping those securities in-house. (Think Fidelity, Charles Schwab, etc.) Many people are more comfortable knowing that their investments are being held in a safe location rather than with an individual or smaller firm, or worse, not being held or invested at all.
  6. NOT KNOWING YOUR PORTFOLIO STRATEGY OR PORTFOLIO MANAGER Diversification is important, so you’ll want to ensure that the financial advisor you choose will invest in a variety of stocks, both domestic and international and use a qualified portfolio management team to accomplish this. Unlike a mutual fund, or static ETF, an active strategy with an experienced portfolio manager does not have mandates and can navigate the market without being handcuffed, allowing the active manager to potentially and significantly benefit the client in the long run, more than making up for the fee paid for management.

However, one of the most important things to look for is an advisor you feel comfortable with; someone whose investment philosophy is a lot like yours; someone you can contact with questions or concerns and above all else, you can trust. While it might take a while to find your financial advisor match, you can be certain that they’re out there. You just have to find them.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Focus Asset Management with Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Focus Asset Management and Advisor Websites.