It’s true: Money can’t buy you happiness. But it can buy your financial freedom—and it’s a lot easier to be happy knowing you can afford your necessities and do the things you love without running out of means.
You can take several paths to financial freedom, but perhaps the easiest—and certainly the least lonely—is the path you walk alongside a financial advisor.
A financial advisor can be many things, but they largely serve to help people make the right financial decisions across a variety of disciplines, such as investing, taxes, estate planning, retirement, even budgeting and spending. However, because advisors can make an impact on so many aspects of your life, it pays to make sure you’re selecting the right one.
That’s easier said than done, however. So to help you out, I’m going to walk you through some of the most common mistakes people make when selecting a financial advisor. Hopefully, you can learn from these errors and hire someone you can work with for a lifetime.
Choosing a Financial Advisor? Don’t Make These Errors
Finances are one of those topics where you don’t realize how much you don’t know until you learn a little bit.
Consider the 2023 Goldman Sachs Asset Management Retirement Survey & Insight Report, which included a survey that asked five financial literacy questions. Respondents with the lowest levels of financial knowledge were the most likely to handle their retirement savings, while those with the highest levels were the most likely to seek professional counsel.
In other words, once people really start to understand what they’re getting into, they realize just how much help they actually need.
When people do get that financial help, they unsurprisingly feel a whole lot more confident. In Northwestern Mutual’s 2024 Planning & Progress Study, nearly two-thirds (64%) of respondents with a financial advisor said they feel financially secure, while only 29% of people without an advisor said the same. Meanwhile, 75% of respondents with an advisor believe they will be financially prepared to retire, versus just 45% of those without an advisor.
That said, once you do decide to make the plunge, it’s critical to find an advisor who is qualified and able to address your needs. So as you go about choosing a financial advisor, you’ll want to avoid making these mistakes.
1. Not Asking About Credentials
Anyone can call themselves a financial advisor or financial planner on social media—but what ultimately helps best define what a financial professional can do for you is their credentials, certifications, and licenses.
Among the most important designations to look for:
- Certified Financial Planners™ (CFP®): CFP® is an industry-recognized credential demonstrating an individual has met a higher standard of excellence through meeting education, experience and ethical standards. A Certified Financial Planner™ must act as fiduciaries for their clients. As part of maintaining the CFP® certification, holders must complete at least 30 hours of continuing education every other year. These financial professionals specialize in comprehensive financial planning services.
- Certified Public Accountant (CPA): CPAs are licensed professionals specializing in numerous areas of accounting, such as tax planning and preparation, financial analysis and reporting, and auditing and attestation services. Licensed CPAs must meet stringent education, experience, ethical and testing requirements to receive their license and then complete at least 40 hours of continuing education annually. They’re also bound to follow a rigorous code of professional conduct that requires them to act with integrity, objectivity, due care, and competence. While most individuals likely think only of “taxes” when they hear that someone has a CPA license, CPAs are often skilled in many areas and able to offer a robust number of financial services.
- Chartered Financial Analyst (CFA): CFA designations represent a higher level of competence and integrity for financial professionals. These individuals specialize in investment analysis and portfolio management. Usually, CFAs don’t work directly with regular financial consumers and instead opt for institutions, so these are harder to find working as a retail financial advisor.
- Chartered Financial Consultant (ChFC): Chartered Financial Consultants have expertise in financial planning and specialize in insurance matters. This certification is an alternative to the CFP®.
For a longer list of credentials to look out for, check out our guide on how to choose a financial advisor.
Related: Do I Need a Financial Advisor? 7 Questions to Ask Yourself
2. Not Selecting an Advisor with a Fiduciary Duty
The U.S. Securities and Exchange Commission (SEC) states that a fiduciary has the following duties:
- “Provide advice that is in the best interest of the client”
- “Seek the best execution of a client’s transactions where the advisor has the responsibility to select broker-dealers to execute the client trades”
- “Provide advice and monitoring over the course of the relationship”
Put differently: Fiduciaries are held to higher ethical standards than advisors who are not.
And not all financial advisors are fiduciaries.
Financial professionals like a CPA, or those carrying a CFP® or AIF® (Accredited Investment Fiduciary) certification, are obligated to act as fiduciaries. Investment advisors who carry Series 65 licenses and operate with a fee-only or fee-based pricing structure are also considered fiduciaries.
That said, other professionals—including insurance agents, stock brokers, and broker-dealers—aren’t required to put a client’s interest before their own. (However, they do have to provide suitable recommendations for clients.)
All that means is that they might prioritize your interests … or they might prioritize so-so products that aren’t necessarily best for you but will earn them money.
Related: 11 Retirement Planning Mistakes to Avoid
3. Choosing an Advisor Who Doesn’t Offer Services You Need
Before hiring a financial professional, consider what services are most important to you.
Do you want investment advice? Help with tax preparation? Overall wealth management? Similar to home buying, know your “need to haves” and “nice to haves” before you start shopping for advisors.
Let’s say retirement planning is an essential service for you. The 2023 Herbers & Company Service Market Growth Study showed retirement planning was the second most demanded service among consumers with over $250,000 in household assets (beaten only by tax planning). Despite the demand for the service, only 67% of the financial advisory firms surveyed reported offering retirement planning. Someone might be an excellent financial advisor, but if that person doesn’t provide the services you need, the relationship isn’t a great fit.
The title a person gives themselves might offer a clue. For instance, “financial planners typically provide a holistic financial plan, but they might not always help you implement this plan. A “financial advisor,” however, will typically help you both draw up and execute a holistic financial plan.
Ultimately, though, the safest bet is to simply ask the prospective professional whether they provide the services you need.
Related: Budgeting in Retirement: Our Step-by-Step Guide
4. Misunderstanding The Payment Structure
A financial advisor’s compensation often comes solely from their clients. The advisor might charge an hourly, monthly, flat or asset-based fee.
For example, an advisor might charge an annual fee amounting to 1% of all managed assets. Thus, if you had $1 million in assets, the advisor would earn $10,000 a year (taken directly from assets, not your pocket).
However, some financial advisors don’t charge clients a fee—and instead earn their keep from commissions. In other words, these advisors are paid based on the products they sell or the accounts they open.
While “free” financial advice might seem like a win for clients, you can see how a possible conflict of interest would emerge. A commission-based financial advisor who wants to make as much money as possible has an incentive to push specific products and accounts, regardless if they are the best fit for a particular client.
A fee-only advisor is more financially motivated to make the best decisions for their client—especially those that charge asset-based fees. Because if the advisor’s pay is tethered to how well the assets perform, the advisor’s and client’s goals are perfectly aligned.
Related: How Much Money Do You Need to Work With a Financial Advisor?
5. Selecting an Advisor With an Incompatible Strategy
You and your financial advisor should have similar investment strategies.
For instance: If you prefer more conservative investments, you’ll want an advisor that has a more conservative management style. But you wouldn’t want to use that advisor if you prefer to be more aggressive with your portfolio.
The investment tools being used matter, too. Financial advisors commonly purchase assets such as individual stocks, individual bonds, mutual funds, exchange-traded funds (ETFs), cash equivalents, and other products on behalf of their clients.
But maybe you’re interested in part of your investment portfolio containing some less traditional investments, such as cryptocurrencies or other alternative investments. According to a 2023 Journal of Financial Planning survey, 25% of advisors said their clients asked about cryptocurrency over the prior six-month period, but less than 3% said they used or recommended cryptocurrency to their clients in 2023.
Choose a financial advisor whose strategy and preferred instruments align with your goals and risk tolerance.
Related: How to Invest for (And in) Retirement: Strategies + Investment Options
6. Using a “Captive” Advisor
Captive advisors are representatives of major brokerage firms, such as Fidelity, Vanguard, and Schwab. These big firms offer a wealth of services to large corporate clients, but they also handle individual financial planning.
Logically, a large firm will have a wide range of financial products to choose from. But if their advisors only recommend products from within, that ultimately leaves clients with a narrow list of options.
Additionally, these advisors might be overloaded with clients, giving them less time to work on personalized plans for each person. Smaller clients might also receive less attention than “big-fish” clients that sport millions (if not billions) of dollars in assets.
Meanwhile, an independent advisor (one who works by themselves or as part of a small firm) is likelier to sell products from many different companies. That added flexibility can help them better meet people’s needs. You may also get more of their time and energy, and be able to form a closer relationship.
Related: Best Target Date Funds: Vanguard vs. Schwab vs. Fidelity
7. Waiting Too Long
The sooner you crystalize your savings goals, optimize your taxes, start (or hone your) investing, and map out the next years or decades of your financial life, the better.
And thus, the sooner you start working with a financial advisor, the better.
The aforementioned Northwestern Mutual 2024 Planning & Progress Study found that the average age Americans seek out financial advice is 38. That number is getting lower, however—on average, Baby Boomers (and older) sought out formal financial guidance at age 49, Gen X did so at 38, but Millennials have been looking for advice at the young age of 29.
A financial advisor can help with the myriad events going on in a person’s life around their late 30s—getting married, having children, advancing in one’s career or switching careers. A skilled advisor can help couples learn to merge their finances, choose the best account for a kid’s college fund, and determine how much it makes sense to set aside as one’s financial situation evolves.
You might be tempted to wait until you’re a multimillionaire and qualify for wealth management firms that only serve people with a very high net worth. But it’s probably wiser to seek out a financial advisor early on so you can build good financial habits and get started on a financial plan.
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