by Eve Kaplan, Certified Financial Planner (TM)
There are 6 common mistakes people make when engaging a financial advisor — and all of them are avoidable! Before we go through this list, let’s put the issue of paying for financial advice into context.
Health and money are two areas of life where everyone benefits from professional input and support but people handle the wisdom of professional medical care differently from the wisdom of financial care. Do you see your physicians and dentists on a regular basis, refill prescriptions and accept hospital care for serious illness? Do you consider performing surgery on yourself? Of course not!
However…there are several reasons the thinking about financial advice and support gets muddled and confused in people’s minds: 1) the magical thinking that “I can do it myself” when making complex financial decisions and 2) it’s a crazy and confusing world when it comes to types of advisors. For starters, the term “advisor” is impossibly broad and meaningless since it includes “brokers,” “wealth managers” and “financial planners” interchangeably. Fee-based and Fee-only planners are not the same, but everyone confuses the two. In all the confusion, little heed is paid to advisors who are Fiduciaries who put your needs before their own vs. other advisors/brokers who don’t adhere to this standard.
With this in mind, here are the six mistakes people make when looking for a financial advisor:
- #1 Confusing Brokers with Financial Planners: Brokers typically handle a part of your financial life (your investments), but they aren’t charged with looking at your entire financial life (unless you fit high-net worth criteria of $5 million or $10 million or more). A good financial planner will look at your whole financial picture: insurance, estate planning, tax planning and investment management.
- #2 Failing to Do a Background or Reference Check: You have a lot at stake when you decide to work with a professional. At the very minimum, go online to check on an advisor (by name or company) to see if he/she has any compliance infractions: https://www.adviserinfo.sec.gov/ to confirm if he/she has a clean record or not.
- #3 Being Clear About What You’re Getting and How You’re Paying for It: A financial plan is like a car – you spend more for a solid car that you can use for years and you spend less on a quick transport fix that may not last. Some advisors draw up free or low cost plans that follow certain templates and are loss leaders to reel in clients who subsequently purchase investment products that you may not need (e.g. unnecessary annuities, unnecessary insurance). Be clear about how an advisor is paid.
- #4 Ignoring the “F” (Fiduciary) Word: If an advisor is a Fiduciary, he or she upholds a standard of service that requires that the client’s interests always takes priority over the interests of the advisor. A broker is not a Fiduciary and is not held to that standard. An advisor may or may not be a Fiduciary – the title “advisor” is so hopelessly broad and vague that it’s meaningless. If you kick the tires and look under the hood, a Fee-Only financial planner is held to the highest Fiduciary standard and will have the least amount of conflict of interest when providing advice and services.
- #5 Assuming Personality Trumps Experience and Qualifications: When people tell me about their (former) broker, they invariably say “how nice he was” or “how friendly she was.” In other words, these are skilled salespeople who may – or may not – have the credentials you need. A minimum standard for financial planning is the Certified Financial Planner (CFP) designation, but it’s just a starting point. Experience and breadth of service trump personality.
- #6 Having Unrealistic Expectations About Investment Returns: If I meet people who tell me they’d like “at least a 10% return,” our conversation is over before it even started. Performance never can be guaranteed unless you invest in a CD. Never work with an advisor who advertises performance or who promises performance numbers.
In sum, you’re moving in the right direction if you decide you really can’t do figure it all out yourself (because financial life is complicated), you understand how your advisor is compensated, you select someone who looks at your entire financial picture, and you engage a Fiduciary who puts your interests before his/her own.
(C) Copyright 2018 by Eve L. Kaplan. All Rights Reserved.