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Selecting a Financial Advisor

Seeking a Money Magician? 5 Don’t’s When Selecting a Financial Advisor (and 5 Do’s)

Many would-be investors don’t understand the basics of Investments 101. In a way, the process of spending a little money to make more money is a lot like magic: $100 goes into the top hat, and with a wave of the wand, $1,000 comes back out. Most of us need a money magician, aka a financial advisor, to make that magic happen. Selecting a financial advisor is a generally accepted as a must for would-be investors, but what would happen to your investment dollars without a talented financial wizard?

More likely than not, your dollars would be playing the starring role in a disappearing act. Most how-to articles on selecting a financial advisor give you advice on what you should do. This one is different. Read on for some tips on what not to do when choosing your financial guru. (Don’t worry, we’ll still give you tips on what to do, also.)

What Not to Do When Selecting a Financial Advisor

Your financial advisor can make a significant impact on your investment dollars — for better or for worse. While you may already know how to avoid fraud (and if you do not, then be sure to read “Investor Fraud Protection: Who’s Got Your Back?”), there is more than just fraud to consider. Whether you are a brand new investor or a seasoned financier, the wrong financial advisor, even a well-intentioned one, can do some serious damage to your potential for returns.

Here’s what not to do:

1) Don’t listen to your mom when it comes to picking a financial advisor.

Roger Gershman of Forbes explains that word-of-mouth recommendations aren’t always as magical as they seem. When it comes to recommendations from friends, family, the barista at Starbucks or maybe even your psychic, be wary. Gershman explains, “Just because an advisor services your friend’s portfolio well doesn’t mean he will do the same [for you] particularly if your personal goals and objectives differ.”

…word-of-mouth recommendations aren’t always as magical as they seem

2) Don’t listen to your lawyer, either.

Your divorce attorney is probably not qualified to pick your financial advisor. You might assume that the lawyer you hired for your personal injury case would be the perfect person to ask for a lead on selecting a financial advisor. But that’s just not so. Gershman explains that getting advice on selecting a financial advisor from other advisors, attorneys or other financial professionals isn’t a good idea. There is a potential for a conflict of interest or bias, or you may be asking someone who doesn’t even have specific experience in your chosen area of investing and has no real familiarity with the preferred qualities of financial advisors.

3) Don’t accept as #truth what the financial advisor tells you about his or her background.

Once you get a name or names of some prospective advisors, you do not want to make the mistake of failing to research their background. Jamie Hopkins of the American College of Financial Services, told U.S. News that, “You wouldn’t hire a doctor or a lawyer that didn’t go to medical school or law school, so why would you hire a financial advisor who didn’t get educated in financial planning?” Failing to research someone who will be handling your money could lead to dire consequences.

You wouldn’t hire a doctor or a lawyer that didn’t go to medical school or law school, so why would you hire a financial advisor who didn’t get educated in financial planning?

4) Don’t be afraid to ask questions of a prospective financial advisor.

Although it’s true that a magician will never reveal their secrets (so don’t bother to ask!), this isn’t the case when it comes to your financial advisor. Not questioning a prospective financial advisor about his or her plans for your money can lead to less than enchanting results if that strategy doesn’t mesh with yours. AllBusiness says, “a common mistake is blindly following whatever advice you are given,” without asking questions. (FYI: Asking the Magic 8 ball isn’t a good idea, either.)

5) Don’t take his word for it.

In other words get it all in writing. What will your advisor do with your money? Hopefully he’ll do what he said he would do (and in most cases that is exactly what happens), but requiring everything in writing will ensure you have some legal recourse if all goes awry ala Bernie Madoff. (It happens.) The unassuming former chairman of the NASDAQ spear-headed the largest financial fraud in U.S. history to the tune of $64.8 billion, turning his wealth management business into a Ponzi scheme of epic proportions. And it wasn’t just Mom’n’Pop who got snookered. Kevin Bacon, Larry King and Steven Spielberg were among the rich and famous who lost their substantial nest egg in the Madoff fallout. While it is unlikely that your money will magically disappear, don’t walk away without a stack of papers, signed and sealed, laying out the path your money will travel.

So why settle for Presto Magic when you can get the David Copperfield of advisors?

You Don’t Need to Cast a Spell to Make Your ‘Dream’ Financial Advisor Appear

Now that you know what NOT to do, here are some tricks you can use to hire the right advisor for your financial needs:

1) Start your quest by deciding what kind of advisor you want.

Liz Frazier Peck at Forbes recommends that you narrow the field by selecting your advisor based on how they are paid. You can choose from:

  • Commission-based: Peck says you run the risk of conflict of interest with this type of advisor because they are paid based on the products they sell.
  • Fee-based: This type of advisor is a hybrid of commission-based and fee-only advisors in that you pay them a flat fee or hourly price, but they also make money through commission of products.
  • Fee-only: These advisors are not paid through commission. They make money through hourly service, a flat fee, or via a percentage of assets made.

2) Research, research, research.

Wave your figurative magic wand and do a Google search. There are so many invaluable articles online that provide a wealth of information to help you select a financial advisor. Need some specific suggestions on where to start? Begin with the SEC’s roadmap to picking a financial advisor that will meet your specific needs. Then, consider FINRA’s recommendations. 

3) Troll the SEC

After you narrow down your choices, but before you speak to anyone, vet your advisor/their firm using the SEC’s Investment Adviser Public Disclosure website. Don’t consider anyone who has been shown to engage in unethical behavior or has been disciplined by industry regulators.

4) Ask as many questions as you can think of, then ask some more.

You don’t need to be a mind reader, but you do need to ask questions of your prospective advisor. Don’t know what to ask? Read “5 Things You Should Ask Your Financial Advisor” for some ideas on what to focus on when interviewing potential advisors 

5) Use common sense, trust your instinct.

Once you have narrowed down your options, talk to all potential advisors. Can you easily communicate with them? Do you have a good rapport? Do they explain terms of art, or do they talk over your head? You must be able to interact positively with the advisor you choose. Selecting a financial advisor who makes a lot of promises is risky; they might just be an illusionist.

You may also like, “Are Financial Advisors Obligated to Reveal their Own Money Issues?”

In the end, the best financial advisor won’t rely on magic to make wise (and profitable!) financial investments. Make sure that your ultimate choice is based on well-researched facts — and not hocus pocus.

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About Cristina Nolan

Cristina Nolan, Director of Webinar Services at Financial Poise, earned her law degree in 1997. Cristina has worked in online education since 2004 and has significant experience in the design, development and execution of online curriculum at the college and graduate school level. She is also an experienced legal editor. Courses she has taught include…

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