6 Biggest Mistakes To Avoid When Hiring a Financial Advisor
Upping your financial knowledge game this year is something that will bring benefits throughout your lifetime. Self-studying is a low-cost way to learn personal finance strategies, but when it comes to your money, it often makes more sense to pay a pro.
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According to a 2023 study by the National Financial Educators Council (NFEC), the average estimated amount of money a lack of personal finance knowledge could cost you is $1,506. While it will cost you to meet up with a financial advisor, it can be well worth the expense, especially when talking about complex tax questions, medical care, retirement savings or legal worries.
Making the right choice when deciding on a financial advisor is like making any big financial decision: You need to do your research. According to experts and financial service providers, you should try to avoid these six common mistakes when hiring a financial advisor.
1. Not Defining Your Financial Needs
As Forbes noted, before your start searching for a financial advisor, clearly define your financial goals. You might not require a budgeting or debt management specialist, but might be in serious need of a tax planner or investment advisor. Some advisors are great at planning for all your financial needs, while others have specific areas of expertise. Still, others provide sound emotional support in your non-financial life. Deciding what you need will guide your search.
2. Not Figuring Out Fee Structures and What You Want To Pay
Financial advisors have different ways of charging you for their services. Some charge fees based on an annual flat fee, an hourly rate or a percentage of your investment assets. Whether you choose an advisor that uses one of these structure or one that charges a commission — or if you decide to use a robo-advisor (an automated online investing platform) — understanding how your consultant will be compensated and how much you can afford for their services is one of the first things you’ll need to look into.
3. Avoiding Doing Your Research
Avoiding doing your research is something that can impact your financial well-being and future goals. For example, you need to know if an advisor is a fiduciary, committed to acting in your best interest, or one who relies on selling commission-based products. You need to check their reputation, credentials, experience and approach so their advice jives with your objectives.
Word-of-mouth is a great way to find an advisor that is deemed trustworthy by someone you feel is trustworthy, Forbes noted. But ultimately, you have to choose an advisor that meets your needs. For that, a quick internet search for professional associations like the National Association of Personal Financial Advisors (NAPFA), the Garrett Planning Network, the XY Planning Network and the Alliance of Comprehensive Planners (ACP) will provide you with a wealth of information and strong leads. Additionally, you can check databases like FINRA’s BrokerCheck or the SEC’s Investment Adviser Public Disclosure (IAPD) to verify an advisor’s history and ensure there are no red flags.
4. Rushing the Decision
Unless you’re in a tight bind, you should take your time when selecting a financial advisor. A rushed decision can lead to choosing an advisor who may not be the best fit for you. As Carver Financial Services advised, “Make appointments with at least three advisors or firms. Ask them all the same questions, and take good notes. Then go home and compare their answers. Which one seems to be the best fit for you?”
Whatever you do, don’t hire the first advisor you meet. While it’s tempting to hire the advisor closest to your home or the first advisor in a Google search, the decision requires more time.
5. Overlooking the importance of hiring a team
Carver also recommended working with a team of advisors rather than an independent expert. Having backup in case your advisor retires or passes will provide a safety net and a safe feeling that all the work you’ve done together won’t be for naught. Having a team of advisors with a wealth of experience will benefit your overall financial goals and knowledge.
6. Choosing Someone That You Don’t Trust
According to Paladin Research & Registry, some people looking for investment advice choose advisors that will promise financial success. For the most part, these consultants charge more for their services and may recommend taking more risks than you’re willing to get better returns. Unless your goal is to make money as quickly as possible, you should be looking for a financial advisor that sets reasonable investment expectations that are in your best interests, and one you can establish a trusting relationship with over time.
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This article originally appeared on GOBankingRates.com: 6 Biggest Mistakes To Avoid When Hiring a Financial Advisor
