Financial Poise
magician's poster, representing what not to do in looking for financial planning advice and a financial planning advisor

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

Many would-be investors don’t even understand 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 planning advisor, to make that magic happen. Seeking out financial planning advice is considered 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 planning 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 Planning Advisor

The financial planning advice you get can make a significant impact on your investment dollars — for better or for worse. While you may already know how to avoid fraud, 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 planning 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.”

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

Your divorce attorney is probably not qualified to pick your financial planning 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 financial planning advice. 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.

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 financial planning 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.

4) Don’t be afraid to ask questions.

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 her word for it.

In other words get it all in writing. What will your advisor do with your money? Hopefully she’ll do what she said she 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’Pops 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 financial planning advisor:

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) You must 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. But since we know not all financial planning advice is good advice, we have suggestions on where to start. Begin with the SEC’s roadmap to picking a financial planning 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.

5) Use common sense, and trust your instincts.

Once you have narrowed down your options, talk to all potential financial planning 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 planning advisor who promises money magc is risky; they might just be an illusionist.

In the end, the best financial planning advice doesn’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.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Personal Finance & Investing Fundamentals 2.0 – 2019 and Alpha, Beta & Other Key Concepts. This is an updated version of an article originally published on Nov. 17, 2017.]

©All Rights Reserved. June, 2020.  DailyDAC™, LLC d/b/a/ Financial Poise™

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