Financial advisors can be a blessing or a curse.
They certainly fulfill needs for many who struggle to understand and practice finances.
If you’re making a living wage but can’t stay under budget, you might need a financial advisor. If you’re considering investing money but don’t know where to begin, you might need a financial advisor.
But not all financial advisors are worth hiring.
Some put their own interests before yours. Some simply don’t know what they’re doing.
So the question is: how do I avoid the bad ones?
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Here’s a list of red flags to look out for. If a financial advisor has one or more red flags, they may be a bad choice.
1. They aren’t certified
Certification may differ depending on the advisor’s specialty. If you’re looking for a financial planner, a common designation is a Certified Financial Planner (CFP).
Check out their personal website. Typically they have a section that explains their education and experience.
Never be afraid to ask a financial advisor if they’re certified. You may want to do additional research to properly understand their certificate.
Does the certificate come from a trusted source? Is the certificate related to the specific work you’re asking for?
Research the requirements to obtain and maintain the certificate. What are the initial requirements to get the certificate? What does it take to maintain the certificate?
These answers show a financial advisor’s education and willingness to improve their skill.
If they have multiple certificates that’s a good sign. If they can’t produce a certificate, consider hiring someone else.
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2. They aren’t a fiduciary
A fiduciary is a financial advisor who has pledged to look after the client’s best interests.
Some advisors are only held to suitability standards.
A suitability standard means the advisor is not obligated to look out for a client’s best interest. It implies they make suitable recommendations for you.
If a financial advisor is a fiduciary it’s not a guarantee they will look out for your best interests.
But if a financial advisor is not a fiduciary beware.
The best course of action is to analyze the person to see if they practice fiduciary standards.
Don’t be afraid to ask, “Are there areas where you are not held to a fiduciary standard?”
Also, figure out when they became a fiduciary and when they became a financial advisor.
Let’s say they’ve been a financial advisor for 2 decades, but only became a fiduciary 6 months ago.
It’s possible the advisor didn’t practice fiduciary standards for a long time, and only recently became one in title.
3. They can’t pass a background check
Research a financial advisor before hiring them.
Start with Googling them, but go beyond that. Don’t be afraid to ask direct questions, such as “Have you ever been convicted of a crime?”
If a financial advisor was convicted of a crime I don’t need to tell you that’s bad news.
Also ask if they have ever been under investigation by any organization, even if they were found innocent.
If a financial advisor has been under investigation you may want to research that incident.
Investigations do not imply guilt, but they should give you pause.
Financial advisors should also be able to provide references of current clients. Verify them and ask other clients what it’s like to work with this particular financial advisor.
When checking references try to find current clients who are using the same service as you.
If you plan to use this advisor for financial planning, ask for a client who is also using the advisor for financial planning.
How long have the clients been with this financial advisor? Are they satisfied? Do they feel the advisor has their best interest in mind?
Researching a financial advisor takes time and effort, but it’s a necessary precaution.
It keeps you safe and gives you peace of mind.
Does your financial advisor have a red flag?