The Holtz Group

Don't Make These Mistakes When Choosing Your Financial Advisor

Choosing a financial advisor who understands your needs and aligns with your interests is crucial to achieving your financial goals. Finding the right fit is key, as suboptimal strategies, conflicts of interest, and misaligned incentives can negatively impact your financial well-being. To avoid these issues, knowing what to look for when selecting an advisor is important. Keep reading to learn about common missteps during the selection process and discover tips and strategies for making an informed decision.

1. Choosing a financial advisor who restricts your choices

When selecting a financial advisor, there are plenty of options. With so many specialties and areas of expertise to consider, it can be overwhelming to determine the best fit for your needs. To make the process easier, it’s essential to do your research and interview multiple advisors to find the one that aligns with your financial goals. Additionally, it’s essential to find an advisor with a similar risk tolerance to your own. Choosing an advisor who favors high-risk investments when you prefer a more conservative approach could lead to financial frustration. Always remember that you’re in control, and it’s your money, so take the time to find an advisor aligned with your financial goals.

2. Choosing a financial advisor who goes by the Suitability Standard

The wrong incentives can lead trustworthy advisors to make questionable decisions. To understand this better, knowing the difference between the Fiduciary and Suitability Standards is important. By definition, a fiduciary is required by law to put your best interests first, even if it means a disadvantage for them. With a fiduciary standard, you can be assured that the financial advisor has your interests at heart. 

However, some advisors may not follow this standard and instead operate under the Suitability Standard, which only requires them to recommend options that are suitable for you, but not necessarily the best fit. For example, an advisor with an insurance license may suggest policies that give them the highest commission rather than the most appropriate coverage for you. 

3. Not considering your financial advisor’s specialization

It’s important to consider their area of specialization when selecting a financial advisor. Just like in any other profession, financial advisors have different areas of expertise and experience. For example, some may specialize in retirement planning. In contrast, others may focus on tax planning or investment management, so it’s crucial to choose an advisor with experience in the area that you need help with. For example, if you’re looking to retire soon, you may want to work with an advisor who specializes in retirement planning and has a track record of helping clients achieve their retirement goals. Working with an advisor with the right expertise can make a big difference in the quality of advice you receive and the outcomes you achieve.

4. Not understanding your financial advisor’s pay structure

Understanding how a financial advisor is paid helps you choose the right one. Financial advisors generally fall into two categories: fee-only and fee-based. Fee-based advisors charge a transparent fee for their services, hourly or as a percentage of your assets. However, they may not always act as fiduciaries and may sell you products for a commission. On the other hand, fee-only advisors charge only a transparent fee for their services and do not receive commissions for selling additional products, which helps eliminate potential conflicts of interest. They are legally required to act as fiduciaries and prioritize clients’ best interests over their own.

5. Assuming your financial advisor has the proper credentials

When finding a financial advisor, it’s essential to remember that not all advisors have the proper credentials, even if they work for big brokerage firms. According to the U.S. Bureau of Labor Statistics, there are over 200,000 personal financial advisors in the United States. However, passing a securities exam like the Series 7, Series 65, or Series 66 is often the only requirement to be hired at a brokerage firm.

To ensure that your advisor is qualified, looking for a certified designation in the field is important. For example, only about 88,000 financial advisors have the Certified Financial Planner (CFP) designation, representing a high standard of excellence and expertise due to the rigorous certification process.

In addition to checking for certification, it’s a good idea to ask for references from potential advisors. A reputable advisor should have nothing to hide and be more than willing to offer references to prospective clients. Taking a few minutes to check references and verify qualifications can save you money and headache in the long run.

Need financial advice?

Check out our previous blog post Prevent Common Financial Disasters with These Tips. In addition, if you need personalized financial advice, our team is always here to help—contact us today to book an appointment!