Don’t Make These Mistakes When Choosing a Financial Advisor

Considering hiring a financial advisor? Improve your chances of selecting the right one for you by avoiding these top mistakes.

The wealth advisor you hire plays a major role in whether or not you succeed in reaching your financial goals. No pressure, right? Here are seven common mistakes people make, along with what you can do to get the information you need to make the best decision.

#1 Not checking their credentials

Did you know that almost anyone can hang a sign that says they’re a financial planner? When looking for a financial advisor, you want to make sure that you seek out one with the right qualifications, credentials and training.

We believe that there are two credentials that are of utmost importance: The Chartered Financial Analyst® designation and the CERTIFIED FINANCIAL PLANNER ™ certification. Both are committed to working according to uncompromising ethics and guidelines, plus they must have achieved the top marks in some truly tough training and education.

• The CFA® designation is prestigious and internationally recognized, and those who earn this designation have both a bachelor’s degree and have completed intense on-the-job training, education and exams.

• CFP® professionals also must adhere to rigorous requirements set by the CFP Board that include education and testing.

Other credentials that are worth looking for include Chartered Financial Consultant® (ChFC®), Certified Tax Coach™, and if you own a business, Certified Exit Planning Advisor (CEPA®).

#2 Only looking at credentials, without assessing fit

The right credentials and qualifications are critical, but once you confirm those, you also need to confirm that the wealth manager you’re considering hiring is both a good fit for your financial goals as well as for you personally.

An advisor with experience working with people in your same financial situation and with similar goals to yours may be a better fit for you than someone whose primary experience is working with people who have vastly different goals or situations than you do. Meet with your prospective wealth advisor and be ready with questions about their investment philosophy and approach to ensure they align with your goals.

Similarly, make sure your communication styles sync up. Discuss how and when you will meet with your advisor: by phone, email or in person? Do they prefer regular meetings scheduled in advance, or will you meet on an as-needed basis only? Even more important, what works well for you when it comes to meeting, and are they amenable to that?

Beyond the logistics of communication, make sure you are a good match when it comes to talking about your objectives and needs. Is he or she a good listener? Are they good at explaining things in language that you (as an intelligent person, but non-financial professional) can understand?

#3 Being afraid to ask how they are compensated (or not knowing that you can and should ask the question)

Full transparency should be the goal when someone is managing your investments, and that includes understanding how your financial advisor gets paid.

Most advisors are paid one of three ways: commission only (for selling or recommending certain financial products); fee only (whether that’s an hourly or flat fee or a retainer); and hybrid (meaning they can be paid either way). Find out how your prospective advisor is compensated, and also be sure to ask how you’ll be charged and when. Request an itemization of fees and expenses in writing.

#4 Not understanding the fiduciary standard

Advisors who adhere to this standard are known as fiduciaries, and you should ask if your prospective advisor is a fiduciary and if they are always a fiduciary (both parts of that question are important). If they respond affirmatively to both, it means they are bound by duty to always manage others’ assets in good faith, loyalty, and in a client’s best interest. This can bring you great peace of mind.

Non-fiduciaries, on the other hand, are only required to recommend investment products that are “suitable,” rather than being required to adhere to the fiduciary standard. This can present conflicts of interest at worst, and at best present confusion about whether or not an investment is right for you.

If you would rather not have to worry about these conflicts of interest, look into working with a Registered Investment Advisor (RIA). These firms must be registered with the U.S. Securities and Exchange Commission (SEC) and are bound by fiduciary duty.

#5 Neglecting to bring tax considerations into the selection process

Investment and financial decisions should be made not just in light of risk vs. return, but in the most tax-advantaged way possible. Look for a wealth advisor who is an expert in structuring your assets across accounts with varied tax treatment: tax deferred, taxable, and tax free. Ideally, your advisor will be willing to work closely with your tax professional, as well.

#6 Not knowing how they stack up to other advisors and firms

This is easier to know than it sounds. One way, of course, is by checking their credentials, as mentioned earlier. That commitment alone to earning their CFA® designation or CFP® certification, or of the firm to register as an RIA will tell you a lot about who you’re working with.

But when it comes to investment performance, it’s good to know that you can look into that, as well. The Global Investment Performance Standards (GIPS) is a set of standards that ensure full disclosure and fair representation of investment performance. If the firm you are considering hiring is GIPS compliant, it allows you to see their reporting and how their success compares to other firms.

#7 Only focusing on the personal finance or retirement piece of the picture

When it comes to wealth management, it’s not just about your personal investments or the lifestyle you want in retirement. If you own a small-to-medium business, it can be beneficial to find a wealth advisor who can integrate small business planning—including everything from starting up to taxes to employee benefits to succession—into your overall financial plan.

Likewise for long-term planning, such as estate or legacy planning, that will have an impact on your heirs and others. This kind of holistic approach is the best way to maximize your wealth.

Ready to find a wealth advisor that understands your goals, takes a personalized approach, and brings financial advice for your complex needs? At Ironwood Wealth Management, we are committed to getting to know you, not just your finances. Learn more about our credentials and commitment to you, and get in touch with us today.