7 Things to Check When Choosing a Financial Advisor

Most people, rightly, put lots of trust in their financial advisor. Unfortunately, there are some unscrupulous advisors out there who exaggerate their credentials or, worse, scam their clients in order to take their money. Most scammers get away and the money is never returned.

Your financial advisor will help you make sure you have enough money to retire and be with you through your retirement. He or she is also one of the people you will turn to during important life events. Shouldn’t you know more about that person than what you read in an ad or a brochure?

Whether you have a financial advisor or are looking for one, here are some things to look for to make sure the advisor you choose is an actual advisor and not a fake.

  1. Check the Advisor’s Background

Referrals from friends are the best place to start, but check the advisor out for yourself before you hire them. Here are some sites that allow you to see if an advisor has the credentials she says she does and if she has any complaints against her.

  1. Ask How the Advisor is Compensated

Some advisors will charge a flat fee for their services and some will charge a percentage (i.e. 1% annually) of the funds they manage for you. Both of these methods of compensation are considered “fee-based.” The other way an advisor could be compensated is through commissions. Your advisor should explain the fees, if they are working on a fee basis. In addition, if they are working on a “commission basis,” they should be willing to share the compensation structure of the product. While an advisor may tell you the “commission is paid by the company, not you the investor,” this doesn’t address the issue well enough. You need to understand that the higher the commission, the higher the fees for the product and/or the longer the surrender period (e.g. the amount of time you have to stay invested in the product to avoid a surrender charge).

You should receive a Form ADV Part 2 which tells you basic information about the advisor and the company (name, address, etc.) and also the services they provide,  their fees, and if the advisor acts as a broker-dealer, etc.

Beware of an advisor who does not offer this form or hand it over as soon as you ask.

  1. Look at Your Statements

Once you’ve hired an advisor, check the statements you receive. If all statements arrive on the advisor’s letterhead, there may be something wrong. While performance reports may come directly from the financial advisor, regular monthly/quarterly statements should come from independent sources, such as the custodian (i.e. Fidelity).

  1. Whose Name is on the Checks?

Checks requested by your advisor should be made out to the advisor’s business or custodian—never to the advisor personally. Be sure not to create a situation that will give the advisor unlimited access to your money.

  1. Make Sure the Investment is Genuine

Ask if investments are regulated or supervised by a third party. To see if an investment is registered with the Securities and Exchange Commission, visit the SEC’s EDGAR database.

  1. Take Your Time

Immediately after or during a major life change is not the time to make major investment decisions.

  1. Plan for the Future

Most of us don’t like to think about being incapacitated, but having a plan in place that outlines what would happen with our money if something happens to us goes a long way in making sure your wishes are followed. With a financial power of attorney, you can designate a trusted friend or family member to handle your investments in case you’re not able to.

Co-authored by Gary S. Williams, CFP® and Nicholas A. Ibello, CFP®.

Other posts from Gary Williams