I had just celebrated my 22nd birthday a few months before I started my career as a financial planner in 1985.
My training manager told me that he used the “friends and family” approach to develop his client base when he started. He was older than me and this was his second career so it sort of made sense at the time. He had friends that were just like him: middle-aged, successful mid-management business people. The problem with this plan was that all my friends were recent college graduates. They were all young and flat broke—just starting their careers, just like me. Since I didn’t have rich parents or any wealthy uncles, the “family” part fell short too.
I didn’t have a clue how to get older people to work with a young, just out of college guy with a brand new securities license. So other than buying a decent suit and growing a beard to look older, I had to come up with a plan. I figured if I got really smart about financial planning, the actual subject matter of tax planning, investment management, etc. AND use that knowledge to earn people’s trust, maybe someone would hire me as their financial planner.
Well, over 35 years later, I still think those very basic principles apply.
When deciding to engage with a financial advisor, you need to know you’re working with someone that you can trust to do what is best for you in every situation. Trust is imperative when working with a professional to co-craft a unique financial plan designed to deliver your ultimate life goals. The alternative is that you might end up working with someone who sells you products you don’t need, to earn commissions that line their pockets, and slowly drain you of your financial resources. This can leave you scrambling to figure out how to secure your future when the time for retirement arrives.
Let’s explore some warning signs that you may not be working with a trusted financial advisor.
- Choosing a Financial Advisor should not be a popularity contest. Bernie Madoff was incredibly well-respected, well-liked and very popular in the industry, at his country club, and his synagogue. Yet he orchestrated one of the most notorious investment Ponzi schemes of all time, defrauding investors of tens of billions of dollars over almost two decades.
I find it interesting that when I ask how people found their current financial planner, they often say they met them on the golf course, a social event, or he’s their neighbor’s brother-in-law. The old “friends and family” method that my manager suggested back in the ’80s is still alive and well, but I wonder how many people today take the time to vet their advisors properly. With technology today, it’s easy to make sure you’re hiring the right person, not simply because they have a good personality, play a good golf game, and everyone at the club likes them.
Please remember, I’m not suggesting that meeting a financial advisor through networking or a friend is in some way wrong—it is a perfectly acceptable way to meet. Getting a referral for a financial advisor is as routine as getting a referral to a good attorney, CPA, or doctor. Just don’t let the warm and fuzzy way you meet stop you from doing your homework.
- Your financial advisor promises you significant returns. Part of the reason why Madoff’s firm was so enticing was that he promised 15 – 18% returns when everyone else was making much less.
In hindsight, it’s easy to see that this is a major red flag. However, when someone is sitting across the table explaining how rich you will become, it’s a little trickier to spot the issue.
Because of the way markets work, returning an average of 7 – 10% per year depending on your specific investments, you should be incredibly wary of anyone that is promising consistent double-digit returns on your investments.
Suppose your financial advisor has promised you significant returns, only focusing on the upside and promising you that there will never be a downtime. In that case, that is a great reason to proceed with caution.
- Your financial advisor has not explained how they are compensated. It’s no secret that your financial advisor is paid to do a job, and rightfully so. Through their work, financial advisors can have an incredible impact on the lives of their clients, helping to reduce financial stress, managing their investments and taxes, and much more. The issue lies when financial advisors aren’t forthcoming about how they are compensated and if they serve their clients as a fiduciary.
Being a fiduciary means that they are obligated to put their clients’ interests first. Ask if your financial planner is a Registered Investment Advisor Representative or CERTIFIED FINANCIAL PLANNER™ practitioner. These both serve clients as fiduciaries.
Alternatively, financial advisors choosing not to serve clients under a fiduciary standard are commonly compensated by a third party for selling specific financial products. For example, suppose your financial advisor is commission-based, and they sell you an annuity from a particular company they work with. In that case, they will receive a commission on the back end from that insurance company. This can create an incredible conflict of interest as financial advisors have to decide if they will give the client what’s best for them or what they are most incentivized to sell, as commission amounts vary from product to product.
If your financial advisor has limited access to specific product-type solutions and implies that the work they do is “free” to you, that is a major red flag and a pretty good indicator that you’re working with a commissioned salesperson.
- You don’t hear from your financial advisor unless you call them. To successfully plan towards a better financial future, both client and advisor need to be proactive in their communication. As a client, you must update your financial advisor with any life or circumstance changes as they arise.
One of the most significant aspects of the financial planning process is adapting the financial plan to fit a client’s ever-changing life goals. Therefore, your financial advisor should actively communicate with you and schedule review meetings throughout the year. If there is a communication breakdown, there will be a breakdown in the financial plan.
If you aren’t hearing from your financial advisor regularly, that is a significant warning sign.
Now that we’ve covered a few of the big red flags to watch out for, let’s look at what a trusted financial advisor looks like.
- They are a CFP® professional. The CFP® or CERTIFIED FINANCIAL PLANNER™ designation is the standard of excellence in the industry. To become a CFP® professional, financial advisors must meet a minimum 4-year work experience requirement, complete a bachelor’s or equivalent education requirement, and pass a difficult industry exam. Most importantly, each CFP® professional must commit to an ethical and fiduciary standard of conduct, promising to put the interest of their clients above all else.
Working with a CFP® professional ensures that your financial planner not only has the expertise to advise on your situation but also that they have committed to an incredibly high level of ethical and fiduciary standards, a great sign that they are a trusted partner.
- They operate under a non-conflicted compensation model. Steven D. Levitt, Economics Professor at the University of Chicago and author of the best-selling book, Freakonomics, put it best: “Show me the incentive, and I will show you the outcome.”
By working with a financial planner who is compensated by you, the client, you can strategically align your incentives with the incentives of your financial planner. This ensures that your financial planner is working solely for you and that the advice they give is unbiased and unswayed by potential third-party entities, commissions, or incentives.
- They have a clean record with the SEC and FINRA. Lastly, your financial planner should have a clean record with both the SEC and FINRA, two regulatory bodies in the industry, before they earn your trust. You can check your planner’s record by visiting brokercheck.finra.org or adviserinfo.sec.gov and searching their name.
I am here to help.
If you’ve identified any red flags with your current financial planner, it may be time to consider switching to a trusted financial planner. As someone who operates as a fiduciary within a non-conflicted compensation structure and holds the CFP® designation, I am happy to help in any way that I can.
To schedule a complimentary consultation, visit my website and book your appointment!