Statista reports that in 2022, 35 percent of Americans worked with a financial advisor. Finding the right financial advisor is probably one of the most important decisions you will make for your financial future.
A good advisor will help you grow and protect your assets, while a bad one can cost you dearly in dollars, trust, and peace of mind. Here are 12 pitfalls to avoid when choosing a financial advisor to help you make an informed decision.
Don’t Ignore Fiduciary Status
Always make sure an advisor is a fiduciary before hiring them. Fiduciaries are bound by law to act in your best interest, another way of saying they can’t put their interests ahead of you, which is important to avoid conflicts of interest.
The flip side of a non-fiduciary advisor is that they can choose to fill your needs with products or services that they receive financial benefit from and not from you. This distinction is critical and can have a major effect on your financial outcome.
Don’t Skip Credential Verification
An all-too-classic mistake is failing to thoroughly verify an advisor’s credentials before hiring them. See if he or she is a Certified Financial Planner (CFP), holds a Chartered Financial Analyst (CFA) or has 7/65 Series licenses. Trusted certifications ensure your advisor’s technical expertise and ethical grounding.
Don’t Misunderstand Fee Structures
How an advisor gets paid really matters. There are fee-only, fee-based, and commission-based advisors. Since they are paid solely by you, the client, fee-only advisors are often the most transparent.
When you deal with advisors who are paid on commission, they might suggest products that don’t necessarily serve you well. Always ask them to clearly break down their compensation structure so you don’t get any surprise costs or potential conflicts of interest.
Don’t Hire Without Interviewing Multiple Candidates
The first financial advisor many people meet is one they settle for. The financial advisory services market is projected to reach $146.8 billion by 2032, offering plenty of options to choose from.
Interviewing at least three advisors allows you to compare their approaches, expertise, and personalities. After all, you’ll be effectively entrusting your financial health to this person, so it’s worth the extra effort to find the right match.
Don’t Overlook Specialization
Usually, financial advisors focus on areas such as retirement planning, high-net-worth clients, or small business owners. You may be underserved by an advisor whose focus doesn’t match what you need. Decide what your specific financial goals are, and then look for someone with a history of helping people like you accomplish those specific goals.
Jay Zigmont, CFP and founder of Childfree Wealth, advises: “When looking for a financial planner, it is important to understand exactly what you’re looking for. You will find planners who specialize in just about every group, job, and life stage, so find one that fits you.”
Don’t Disregard Investment Philosophy Differences
Your advisor’s investment philosophy should match yours. If, for example, you like conservative, long-term investments but the advisor advocates aggressive, high-risk strategy, this will create conflict and stress. Always vet their approach to ensure it’s a good fit for your financial goals and risk tolerance.
Don’t Be Swayed by Unrealistic Promises
If an advisor claims they can “beat the market” or guarantees high returns, take it as a red flag. The truth is that no one can be certain what markets will do. A good advisor focuses on steady, sustainable growth rather than promises that aren’t so much.
Don’t Withhold Information
Bill Van Sant, managing director at Girard, emphasizes: “The advisor-client relationship, like many relationships, is built on trust and communication.” A great client-advisor relationship is one of transparency — both ways.
If you don’t provide details of your finances, goals, or concerns, the advisor cannot provide relevant advice. The first step to being effective when it comes to financial planning is through open and honest communication.
Don’t Neglect to Check Their Background
Research your advisor’s background and disciplinary history before deciding to commit to them. Check their record using tools like FINRA’s BrokerCheck to confirm that there are no red flags as past misconduct or unresolved complaints.
Don’t Forget to Discuss Communication Expectations
Communication problems can create a ton of frustrations down the line. Specify how often you will be updated — whether this is quarterly catch-ups, email summaries, or year-end reviews. You also want to ensure they’re responsive to your questions and proactive about staying up to date on the situation.
Don’t Ignore Your Gut Feeling
Your intuition matters, even when someone is clearly a good fit. If something is off about them or how they answer your questions, don’t be afraid to keep looking. Your gut feelings can keep you from entering a partnership where things do not feel right.
Don’t Overlook the Importance of a Third-Party Custodian
Your funds should be held (for security and transparency) by a truly competent, trusted third-party/proto bank like Fidelity or Schwab rather than your advisor. This means that you receive independent account statements and don’t risk fraudulent activity.
Disclaimer – This list is solely the author’s opinion based on research and publicly available information.
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