Top 4 Mistakes To Avoid When Selecting a Financial Planner

It has never been easier to invest with do-it-yourself strategies. Still, DIY is not always the best option, especially for investors with a lot of capital or who like to be more active and participate in investment strategy. If you want to make the most out of your money, it is often better to work with a financial planner or advisor over DIY strategies. However, selecting an advisor is not as easy as it sounds; it does require due diligence to avoid the following top four selection mistakes.

1. Talking To a Single Advisor

Sometimes, the first financial advisor or planner you interview seems perfect; their personality meshes with yours, and the strategy they discuss sounds in line with what you were thinking; still, take your time to interview several other professionals. Chances are, the more people you interview, the more you will establish a clear list of likes and dislikes. Selecting the first advisor you interview is potentially cutting yourself and your investment strategy short.

2. Not Checking Credentials

Many investors are fooled by the term financial advisor. The phrase is a catch-all for several professions: holistic financial planner, insurance agent, investment advisor, or something else. The one surefire way to tell which professional you are talking to is to ask for their credentials.  

Holistic-focused professionals focus on financial goals, risk management, and taxes; these professionals might hold certifications as chartered financial consultants or certified financial planners. A chartered financial analyst or CFA is a leader in the financial industry with a specialty in investment analysis and management. 

You should always verify the credentials of the advisor you work with. You can verify the credentials of CFAs through the CFP Board or the CFA Institute. You can also use online vetting tools, such as the Financial Industry Regulatory Authority’s BrokerCheck tool. 

3. Not Acknowledging the Difference Between Fiduciary and Suitability Standards

Before signing a contract with a financial planner or advisor, understand their specialty. Do they follow fiduciary standards or suitability standards of care? 

An expert following the fiduciary standards of care is more concerned with your needs. They will recommend the best investments for you and your investment strategy. The advisor does not make suggestions based on their personal outcome.

The suitability standard of care does not require the same ethical treatment. Advisors are only required to sell suitable investments, not the best. The difference between the two standards typically results in less favorable outcomes for the investor.

4. Not Discussing Compensation

When searching for an advisor, you will likely encounter various pay structures, from fee-based models to commission-based models. Whenever possible, try to find an advisor paid through a fee, salary, or hourly rate; these individuals have nothing to gain from selling you specific investments, meaning you are more likely to receive offers best suited to your needs.

Commission-based advisors should concern most investors because their income is tied to the investments you make and are offered. Essentially, commissions incentivize advisors to act in their own interests, encouraging more-frequent trading and expensive products.

Take your time if you are in the market for a new financial advisor or planner. Research and due diligence is the name of the game. Avoid the above common mistakes and select a professional that puts your needs above their own.