Hiring a financial advisor isn’t like picking a dentist or a mechanic. You’re not only entrusting this person with your money, but also your long-term goals.
You need someone who can make good decisions on your behalf, but also respect your preferences.
“You should be able to feel comfortable to the point where you can sit down and talk about your goals and your fears and your mistakes without feeling judged,” says Luis Rosa, a certified financial planner and founder of advisory firm Build a Better Financial Future.
When vetting a financial advisor, you need to watch for the warning signs that you won’t be able to reach that level of comfort. Here are the red flags.
1. Red flag: They have blemishes on their record
Step one of vetting a financial advisor is looking them up on BrokerCheck, a tool from the the Financial Industry Regulatory Authority that allows you to research the background and experience of financial brokers, advisors and firms. This can let you see if an advisor is legally registered to manage someone’s finances, and whether any regulatory actions or complaints have been filed against them.
“That’s the easiest way to find if they have any regulatory marks against them,” says Christy Matzen, director of financial planning for Zoe Financial, a company that helps connect people to financial advisors.
You can also look up their licenses. For example, the CFP Board has a tool to verify whether someone who claims to be a CFP is actually certified, and whether they’ve been disciplined by the CFP Board or filed for bankruptcy. Other certifying boards have similar tools.
Here are a few of the most common certifications you'll encounter when shopping for an advisor:
CFP (Certified Financial Professional): Probably the certification you'll most want to look for, CFPs study dozens of financial topics including investments, taxes, insurance, retirement planning, and estate planning.
CFA (Chartered Financial Analyst): Advisors with this certification have demonstrated knowledge in accounting, economics, and portfolio management and provide investing advice.
CPA (Certified Public Accountant): People with this certification have studied accounting and tax preparation. CPAs can additionally get certified as personal finance specialists to advise people on financial planning matters.
Here's a list of other financial certifications you might encounter.
2. Red flag: They’re boring
Your financial advisor should be a good communicator, Matzen says. One reason you’re probably seeking a financial advisor is because you need a push to take control of your money.
“I’m not going to be motivated by someone who’s not engaging or able to explain things clearly,” Matzen says.
Even if your advisor is a verified expert, if they can’t convince you to follow their advice, you’re not going to get results.
3. Red flag: They’re not transparent about how they make money
Your financial advisor should be able to clearly explain how they make money. The three most common ways advisors make money are:
Fees: They charge a fee to clients for financial planning.
Investment management: Advisors are usually paid a percentage of the value of the assets under their management.
Commissions: They get paid for selling you annuities, insurance, or other financial products.
You should seek out an advisor who is a fiduciary, Matzen says. This means they are legally obligated to act in your best interest. For example, they can’t convince you to buy a stock because they’ll receive compensation.
Not all financial advisors are fiduciaries. You should ask a potential advisor if they’re a fiduciary if you’re not sure. Those who are registered with the Securities and Exchange Commission have a legal fiduciary responsibility to their clients. CFPs are also required to act as fiduciaries.
4. Red flag: They judge you
You should feel comfortable sharing your fears and goals with your advisor, Rosa says. Your financial plans may not always fit the traditional money game plan. You might want to retire early, or pay for a relative’s education.
“When you do financial planning where you’re touching so many different areas of your life you might have goals that are not necessarily the best financially,” Rosa says.
Whatever your goals, you should find a financial advisor who can help you meet those goals, not talk you out of them.
5. Red flag: They can’t answer tough questions
Aside from checking their credentials, you should also meet with a potential advisor before hiring them. Most advisors will offer a free introductory conversation to see if the relationship is a good fit.
You should ask tough questions as part of this conversation, Matzen says. Ask about their client base and whether it includes people who share your goals and circumstances — if they only work with retirees, you don’t want to be the only client who worried about paying off your mortgage.
“I ask advisors: Give me some constructive feedback you’ve received from a client recently,” Matzen says.
Your relationship with your advisor should be a partnership. If they can’t handle tough questions in the interview, you may want to consider whether they’ll be able handle tough situations with your money.
Image: Luis Alvarez / Getty
