Money brings out the best and the worst in people, and this is very true when it comes to financial planners. The best outcome is working with someone who takes a comprehensive interest in your financial condition, aspirations and life changing events.
But this is often not the case. And it’s good to know the red flags that signal whether your planner has yours or their best interests at heart. Large numbers of trades, unexpected fees and/or a mysterious drop in your portfolio’s value are some of the most obvious signs you’re being fleeced. But there are a plethora of other actions and events to be wary of as you seek to maximize your investing power.
Evasive about pay
Some planners are evasive about how they get paid. When you visit many financial advisors, it can feel like you are getting a free service because you don’t have to pay anything directly out of pocket to see them. That couldn’t be further from the truth in many cases. Under many structures, both the financial advisor and their parent company get paid a commission or fee based on the products they sell.
Indifference towards you
They don’t really care about your needs and goals. If your advisor hasn’t taken the time to truly get to know you, there is no way they can properly advise you about your money. They should try to understand you as a person, along with your goals for life and your time horizon for retirement.
Some planners tell you they can “easily” beat the market. This is a fallacy—if anyone tells you they can beat the market, don’t walk, run in the other direction. A multitude of studies have proven that the vast majority of people, including investment professionals, can’t beat the average long-term returns of the market after fees.
Maybe a Christmas card
You only hear from them once a year. Any advisor worth their salt should make an effort to communicate with you on a semi-regular basis. At the very least they should be calling to see how you are doing, asking you about any major changes in your life and making sure you are on track to reach your long-term goals.
They are beating down your door with all sorts of products. If your advisor is paid by commission, they only make money when you buy or sell something. They are highly incentivized to call you and get you to buy and sell investments.
They haven’t offered you a written financial plan. If you’re paying hundreds, or thousands, of dollars a year to a financial advisor, they should help you plan for the future. It should be more than just a little pie in the sky advice, but a real written financial plan with targets based on your budget and income.
Just hung out a shingle
They have few certifications and qualifications. It’s established that literally anyone can call them self a financial advisor whether or not they are educated and certified, so it’s up to you to make sure they are qualified. Check with financial planning licensing boards, look them up on the Internet and ask friends who may be dealing with them.
They only sell you funds from their own company. When selecting a mutual fund, you should be looking for a low cost option with a proven track record. If your advisor is only offering funds from their own company, chances are you are paying more than you need to and possibly getting worse performance.
Meeting the market
You don’t have to beat the market. You just have to match it, or come close. Over 100 years of returns show that inevitably, the U.S. stock market goes up. You should be investing in low cost (any fund you buy should have an expense ratio of less than 0.25 percent), passively managed index funds (funds that hold all of the companies in the index they track), financial blog The Frugal Vagabond advises.
As a result, you should come close to matching the returns of the market going forward. The long term average returns of the U.S. stock market since inception are about 7-8 percent, adjusted for inflation.
Look for designations
Your best course of action is to hire a financial planner who has at least one of the four major designations. These include certified financial planner, certified public accountant/personal financial specialist, chartered financial analyst and chartered financial consultant, U.S. News & World Report says. These advisors are most always certified and part of organizations that have policing standards.
Remember, you just don’t want to safeguard your money; you want to see it grow. Getting the most qualified financial planner is the most prudent way to achieve this.
Resources: Consumer Reports, The Frugal Vagabond, U.S News & World Report