4 things to know before hiring a financial advisor

Lifestyle Fashion

1. Are you a trustee?

Most people have the misconception that all financial advisers must always act in the best interest of their clients. Unfortunately, this is not the case at all. In fact, only a small percentage of advisers actually act strictly as trustees. Why is this so important? By law, a trustee must always act in the best interest of the client (your).

The easiest way to determine this is to ask the advisor how they are paid. As a trustee, I receive a flat fee as a percentage of the assets that I manage or based on the financial plan that I complete. I do not receive commissions based on the investments that I recommend.

Note that some advisers practice as “hybrid” registered investment advisers (RIAs). This means that at times you will act as a trustee and at other times you may practice under a lower standard (suitability). While this is a convenient record, as it allows them to sell insurance and other commission-based products to their clients and / or charge a flat fee, it can also blur the lines whose interest (yours or theirs) has. priority and when.

If your advisor is a “hybrid” RIA and they recommend investments that charge a commission, you have the right to ask them how much they receive in commission based on whether you invest in the product. To go a step further, ask them why this product is better than others along with a table that includes a breakdown of the analysis they conducted with similar products.

2. What is your area of ​​expertise?

The world of financial advice is unnecessarily complicated. The professional who recommends auto insurance may call himself a financial planner, while a hedge fund manager may call himself the same way. Unfortunately, there is no law that rules against this. However, what is the difference?

One is an expert in property and casualty protection and the nuances of protecting your assets using different insurance companies and riders. The other is an expert in implementing strategies and buying securities to mitigate investment risk. Two different specialties, but both can use the same title.

When hiring a professional to help you achieve your financial goals, understand what your area of ​​focus is. This is especially helpful in understanding your capabilities and limits. It will also help you better understand whether you should keep all of your assets with this person or company.

When I was working as an insurance advisor, I often tried to increase client sales to open an IRA or investment account with me. By doing so, you could help them diversify their investments between insurance and securities while making money from the mutual funds or ETFs they invested in. In some cases this made sense, but for the more complicated cases I was out of my league.

Be honest with your advisor to find out what approach they can help you with. While it may be in your best interest to keep all of your assets with a professional, it may not be your most profitable option or the fastest way to achieve your goals.

3. How does your advice fit into my financial plan?

Every person needs a financial plan. It doesn’t matter if your goals are to pay off student loan debt, buy a home, or make your portfolio last a lifetime.

The easiest way to achieve your goals is to measure your activity and track your progress. Why do you think professional boxers weigh themselves every day? They want to know every day if they are overweight so they can take specific actions to reach their goal. Your financial goals need to be addressed using the same technique: precise measurements.

During your first few meetings, an advisor may emphasize how your product or strategy can help you get on the fast track to your financial goals, but the easiest way to clearly see if this is true is by reviewing their advice within a financial plan.

Doing so will allow you to see how your advice affects other areas of your life, such as income, taxes, legacy, etc. More importantly, it will give you a point of reference to review with any other financial professional who may be helping you and to revisit at your next meeting with that advisor who recommends your solution.

4. Where will my money be kept?

Remember that Bernie Madoff guy? He was the one who was able to maintain a Ponzi scheme (pay old investors with new investors’ money) for at least two decades while stealing several billion dollars. How could he do it for so long?

The most important reason is that your company served as an investment advisor and custodian. This means that you not only chose the securities your clients invested in, but you also kept ownership of the money within your company.

The easiest way to protect yourself from falling victim to a Ponzi scheme is to ensure that your advisor places your funds with an outside custodian. Most RIAs will use one of the main custodians, such as Charles Schwab, Vanguard, TD Ameritrade, or Fidelity.

Placing your money with these companies puts a firewall between your advisor and your account. That means they will be able to make adjustments to the type of securities you invest in and the amount in each, but they will not be able to withdraw funds without your permission. Even better, the custodian will provide a statement, usually monthly, that will allow you to keep track of the activity and the balance (if you decide to open it).

Another quick way to protect your money is to NEVER write a check to the advisor. This is a big red flag that should always be avoided.

There are several other areas that you should focus on when selecting your advisor, but these are the main concerns that anyone should be familiar with. Remember, it is your money and your future. The biggest complaint I hear from clients when we start working together is that they are reluctant to make changes that are in their best interest because other advisers have burned them out in the past. Don’t let your dreams fall victim to an unscrupulous advisor, be aware and protect yourself.

Leave a Reply

Your email address will not be published. Required fields are marked *