6 Reasons to Run Screaming from a Financial Advisor

Do your eyes glaze over from the very beginning of those 401(k) workshops your employer hosts every now and then? Would you rather watch the local weather radar — on a clear day — than absolutely ever tune in to CNBC? Congratulations. You’re normal.

Declaring yourself independent from investment-related noise is winning half the battle. With all the blogs, blather and bile that are ballyhooed in the personal finance world, you would think it’s some kind of spectator sport. Put a camera in front of it, mike it up and fast feed that Tweet: America is transfixed! Wrong. Most people fret about debt, feel things are too dire to retire and simply guess when they invest.

Are you really supposed to figure all of this stuff out by yourself? Of course not. You need help, but who to trust? You want an advisor — not a sales person. Here are six things to avoid when hiring a financial helping hand:

1)    If you hear a lot of jargon, run. Advisors who use technical terms and fancy wordwork to impress you are simply impressed with themselves. You deserve plain English information. Not confusion. Embrace a consultant that speaks like a real person.

2)    Advisors that string a bunch of letters behind their name. If you see CPA or CFP® behind their name, all is well. But chances are you don’t need a CIMA or CFA, or a ChFC or CLU. Certainly, many designations are “accredited” and valid, but when you see someone string a mess of alphabet soup behind their name they’re trying just a bit too hard to gain credibility. And some of these “certifications” are little more than bought and paid for.

3)    A refusal to sign a fiduciary oath.  A lot is being written about the fiduciary standard these days, but here’s the deal, plain and simple: avoid an advisor who will not agree to a written fiduciary standard.  That simply means they are legally required to put your interests first – before their interests, or their firm’s. With such an oath you can expect a relationship without conflicts of interest.  Notice I said “expect.” Trust but verify. If you find a “fiduciary” advisor who is not living up to the required standard, report them.

4)    Beware the advisor who pitches complicated investments.  If a financial consultant is recommending an investment you can’t understand in one thorough, easy conversation, don’t buy it. Here’s the thing: according to the Securities and Exchange Commission, sometimes advisors sell things even they don’t understand. Two lost souls will not find their way out of the woods.

5)   An advisor who is only concerned with your “managed” assets.  You want help with your total financial life, not just the investments your advisor “manages.” Some financial consultants will only want to direct the investments held under their control, considered as “assets under management.” But your financial future can depend just as much – perhaps more so – on investments held in your employer-sponsored 401(k) or other retirement plan, or stock options and deferred compensation. If they don’t ask about these investments that are “held away,” or if they seem unconcerned or disengaged when discussing them, find another advisor.

6)   Seek a fee-only advisor, not a fee-based – Though the words are similar, the difference is great. A fee-only advisor charges an hourly fee for advice or a management fee for assets managed — but earns no commissions.  The hourly fee usually works best for the client, while the advisor usually prefers charging something around 1% of the total value of your assets. The 1% management fee is a tough hurdle to clear when added to the internal expenses and fees embedded in most investments, which a fee-based advisor might also snag a bit of, along with potential commissions. Regardless of which manner you choose to pay for advice, knowing the costs – all of the costs, seen and unseen – can help you decide if you are gaining valuable assistance or yet another drag on the performance of your portfolio.

Hiring a financial consultant is not much fun. You’re looking for a trusted advisor, not a friend. It is a business relationship, and that advisor must be held accountable. Remember, trust but verify.

Photo: Melissa O’Donohue via photopin cc


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