Choosing a Financial Planning Advisor: No Magic Involved

Is choosing a financial planning advisor mystical? Spending a little money to make more money is like magic: $100 goes into the top hat, and with a wave of the wand, $1,000 comes out. Most of us do better with a money magician or a financial planning advisor to make that happen.

Seeking financial planning advice is a must for would-be investors. What would happen to your investment dollars without a talented financial wizard? More likely than not, your dollars would play the starring role in a disappearing act.

If you think this is advice on selecting an advisor, think again. We’re going to show you what not to do when choosing your financial guru. Don’t worry; we’ll sneak in a few how-tos.

What Not To Do

Financial planning advice can significantly impact your investment dollars — for better or worse. While you may know how to avoid fraud, other hazards exist. Whether you are a new investor or a seasoned financier, the wrong financial advisor can severely damage your potential for returns.

Don’t Listen To Your Mom

Word-of-mouth recommendations aren’t always as reliable as they might seem. Be cautious about taking advice from friends, family, the barista at Starbucks, or even your psychic advisor. Qualifications and experience are crucial when it comes to choosing a financial adviser. Just because someone you know made a lucky investment and saw great returns doesn’t mean they can replicate that success for you.

Don’t Listen To Your Lawyer, Either

Your divorce attorney is probably not qualified to choose your financial planning advisor. Nor is the lawyer you hired for your personal injury case. Getting advice on selecting a financial advisor from other advisors, attorneys, or financial professionals isn’t a good idea. There is a potential for a conflict of interest or bias. You may be asking someone who doesn’t have experience in your chosen area of investing.

Don’t Assume the Advisor Is Honest About Their Background

Don’t forge ahead once you get the names of prospective financial planning advisors. Research their backgrounds. Jamie Hopkins of the American College of Financial Services told US News, “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 handle your money could lead to dire consequences.

Don’t Be Afraid To Ask Questions

Although a magician never reveals trade secrets, don’t be afraid to ask your prospective financial advisors many questions. You can count on less than enchanting results if you accept everything at face value. AllBusiness says, “A common mistake is blindly following whatever advice you are given.” Asking the Magic 8 Ball isn’t a good idea, either.

A Good Sales Pitch Is Nice, but Don’t Take Their Word for It

In other words, get it in writing. Make sure you know exactly what your advisor will do with your money. Hopefully, they’ll do what they promised, and in most cases, that is precisely what happens. But written commitments give you legal recourse if all goes awry. Choosing a financial planning advisor who promises money magic is risky; they might be an illusionist.

Remember Bernie Madoff. The former chairman of the NASDAQ spear-headed the most significant financial fraud in US history to the tune of $64.8 billion. He turned his wealth management business into a Ponzi scheme of epic proportions. And it wasn’t just mom’n’pops who got conned. Kevin Bacon, Larry King, Steven Spielberg, and other celebs lost their substantial nest eggs. While it is unlikely that your money will magically disappear, don’t walk away without a stack of signed and sealed papers mapping your money’s path.

No Need To Cast a Spell to Conjur Your Dream Financial Advisor

Now that you know what not to do, here’s what you can do.

Decide What Kind of Advisor You Want

Narrow the field based on how they are paid.

• Commission-based: You risk conflict of interest because they are paid based on the products they sell.
• Fee-based: You pay them a flat or hourly price, but they also earn through commissions.
• Fee-only advisors earn no commissions. They charge a flat fee, hourly rate, or percentage of investment returns.

You Must Research, Research, Research

Look to Google and other search engines. Many invaluable articles are online with a wealth of information to help you choose a financial advisor. Caveat: Not all online advice is good advice.

Consult the SEC

Begin with the SEC’s roadmap to choosing a financial planning advisor who meets your needs. Then, consider FINRA’s recommendations. 

Narrow your choices, but before you speak to anyone, vet the advisor and their firm using the SEC’s Investment Adviser Public Disclosure website. Is any candidate known to engage in unethical behavior? Have industry regulators disciplined anyone? Cross them off your list.

Use Common Sense, and Trust Your Instincts

Once you have the final cuts, interview potential financial planning advisors.

• Can you easily communicate with them?
• Do you have a good rapport?
• Do they explain things clearly, or do they talk over your head?
• Do you feel positive and comfortable about the interaction?

Ultimately, the best financial planning advice doesn’t rely on magic. Due diligence is your best weapon. Wise and profitable investments depend on well-researched facts and solid advice — not hocus pocus.

We think you’ll also like:

1. Diversifying Beyond Bonds in Retirement Planning
2. Getting More Value From Your Lawyer-Client Relationship
3. The Government’s Clash on Fiduciary Responsibilities and Your Advisor’s Retirement Advice

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Preparing for an Arbitration
2. Negotiating an M&A Deal
3. What Kind of Loan?

This article was originally published on June 26, 2020 and updated on November 28, 2022.] 

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