So you’re ready to hire a financial advisor – that’s great! A good financial advisor will help educate and coach you through some of the hardest and most impactful decisions you’ll make for your future. No pressure, right?
We understand the process of interviewing financial advisors can be hard to approach, but we’re here to alleviate some of the stress and confusion. While you continue your search for the right fit, here’s five mistakes to look out for and avoid, if possible.
Mistake #1: Hiring an Advisor Who Is Not a Fiduciary
If you’re conducting a search for a financial advisor, you may have come across the term “fiduciary,” but what exactly does it mean?
A fiduciary is an individual or organization who has a legal duty to act in the best interest of someone else. Fiduciaries avoid conflicts of interest, including making suggestions that lead to their own financial benefit. In the finance industry, fiduciary financial advisors must only recommend, buy or sell investments or financial products that are the best fit for their clients.
If you choose to work with a financial advisor who doesn’t have a fiduciary duty to you, they may be able to recommend investments or products that pay them a bigger commission over ones that would otherwise be the best fit for you and your goals. This could cost you more money and/or limit your opportunities.
The easiest way to verify that a potential advisor is a fiduciary is to ask them. Here’s the best way to word the question: “Are you a fiduciary 100% of the time?” The answer you’re looking for is: Yes!
Related: Are You Working With a Trusted Advisor… or a Salesperson?
Mistake #2: Confusing the Terms “Fee-Based” and “Fee-Only”
When seeking a financial advisor you’ll encounter two types of fee structures: fee-based and fee-only. The difference between the two might not be immediately apparent, but all fiduciary financial advisors are fee-only.
Fee-only financial advisors earn money exclusively through the fees that their clients pay. These fees are often calculated as a percentage of assets under management (AUM) – for example, a fee could be 1% of the value of your assets that are under your financial advisor’s management. Other advisors may charge a flat fee or an hourly rate for their financial planning or consulting services.
Either way, a fee-only financial advisor doesn’t receive payment from any other source.
On the contrary, a fee-based financial advisor makes money through the fees their clients pay in addition to other streams of income. Here are the three main ways that fee-based advisors could make money:
- From brokerage commissions when acting as a broker-dealer. If your financial advisor is also a broker-dealer, they earn commissions for executing trades. The advisor could also buy or sell securities from you, potentially earning a spread.
- From selling mutual fund shares. Some mutual fund companies pay commissions to brokers for selling you shares of their funds.
- Through insurance commissions. Some financial advisors are also insurance agents. If so, they make commissions from selling insurance products.
In these instances, the advisor has a financial incentive to sell their clients products from which they can earn a commission, even if it isn’t necessarily the best product for the client. So fee-based financial advisors don’t act as fiduciaries all the time – while a fee-based advisor who is registered with the SEC is generally bound by fiduciary duty when acting as an advisor, they generally can sell products (with commissions) as long as they can make a case that the product fits the client’s general needs (this is called the suitability standard).
In short, fee-based financial advisors don’t act as a fiduciary 100% of the time.
Related: Fiduciary vs Suitability
Mistake #3: Choosing a Financial Firm Based on Name Recognition Only
Consumers often gravitate to brand names, but when deciding who will help you manage your finances, a big bank (or wirehouse) may not check all of the boxes.
First and foremost, there is a strong sales culture that exists in the wirehouse environment because at big banks, their stock price is dependent on growing revenue and sales. Whether it’s mutual funds, insurance or another financial product, a sizable portion of the company’s profits are typically made from sales. So instead of recommending a low-cost product or service, they might upsell by recommending a more expensive, proprietary product.
Which leads us to the next point: These wirehouses typically do not adhere to the fiduciary duty. In many instances, they lean into the suitability standard – meaning they are less stringent than the fiduciary standard in terms of the advisor’s obligation to make recommendations in their client’s best interest.
But for most investors, the main distinction between wirehouses and an independent financial advisor is the service model. Most independent financial advisors have a team-based approach to client service, not a sales-based approach, so they have the ability to provide a more personalized and flexible service approach.
While large and well-known wirehouses may be hard to block out from your search (especially their advertising), you may find more success in asking for a financial advisor recommendation from a friend, family member, colleague or community member.
Mistake #4: Hiring an Advisor Who Focuses on Just One Area of Planning
Perhaps you began thinking about hiring a financial advisor for one specific aspect of your finances – many people come to us with questions about investing and saving for retirement. But what you will soon find out is that all aspects of your financial life are linked. Occasionally or frequently, they interrelate. That’s why hiring a financial advisor that does comprehensive planning is so important.
Comprehensive financial planning involves a detailed review and analysis of all facets of your financial situation. It’s a holistic approach that is built around your goals and your core values. It addresses:
- What’s important to you?
- How does your wealth relate to that?
- What do you want your wealth to accomplish?
- What could your wealth accomplish for others?
Comprehensive financial planning is more than the management of investments or the creation of a retirement plan, it’s about actively planning for and addressing life goals and events.
Mistake #5: Not Considering Bautis Financial
We share this information with you because we want you to have the best experience working with a financial advisor, and you’ll be able to experience that care if you choose to work with us. Bautis Financial is proud to check all of the boxes above… All that’s left to do is to make a proper introduction!