Financial advisors have a poor reputation. Multiple stories of malfeasance by advisors working for celebrities and professional athletes might lead one to think all financial advisors are crooks.
The good news is that the characterization of criminal behavior among financial advisors is inappropriate. Just as in any profession, there are good advisors and there are bad advisors.
There are those who know the business and work for the good of the client, and there are those who concentrate more on making a living off of clients than producing a pleasing rate of return.
Let’s make sure you hire the “good’’ financial advisor. And let’s do so by pointing out behaviors that might cause you to question the value of any particular advisor.
A big red flag is legal issues. Check on a financial advisor’s previous performance to determine if any legal action has been taken against that advisor.
Websites such as the Security and Exchange Commission’s Investment Advisor Public Disclosure or the FINRA BrokerCheck allows you to search the name of an advisor to see if any complaints have been filed against that advisor from consumers or others involved with him or her.
Note that some actions taken against advisors are retaliatory in nature and might be frivolous; one hit on these sites should not preclude you from working with that advisor.
Second, check your advisor’s training. Look at his or her business card. It’s not necessary for a financial advisor to have certifications attached to his or her resume, but certifications in the financial advisor world are significant.
With some certifications the advisor studies for 100 hours to qualify. A certified public accountant (CPA) can serve as your financial advisor, and many people go that route, but a certified financial planner (CFP), a chartered financial consultant (ChFC) , or a chartered financial analyst (CFA) has worked diligently in order to provide the best financial advice.
If you are talking to an advisor who does not have any certifications, ask them “why not?”
Follow the dollars
Finally, how is the advisor making money? Financial advisors either charge you a fee to work with you or they charge commissions on the transactions they conduct for you or the products you invest in.
After the Great Recession in 2008, more consumers were wary of investors charging commissions and much of the business moved to a fee-based operation. But what is important is that you understand the fees you are paying.
Often, the fees are based on how much assets (in dollar value) the advisor is managing, but fees can be hourly based or performance based (you pay for each transaction or operation the advisor handles).
Since fees or commissions are often the reason investors avoid advisors the advisor should present his information in a way you understand. If the advisor you are speaking to cannot explain his fees to you — move on.
Other factors that you should investigate are the communication habits of the advisor. Are they available to you when you need them, and will they call you when something is going on that matters to your account. Are they listening to what you want to do with your money, or are they pushing you in a direction you do not want to go, or do not understand?
Remember that the advisor works for you. You are the boss. There are a million financial advisors for you to choose from. You should be extremely comfortable with your choice before you sign your name to any document.