Don’t Get Taken By A Sketchy Financial Advisor

How to put the best financial team in place

The following was written by Stacey Tisdale:

While President Obama is doing what he feels is the best way to make sure Americans get the best possible financial advice – unveiling a new federal regulation recently requiring financial advisors to put the best interests of their clients ahead of incentives to direct them to particular products – it’s still up to you to find a financial advisor that understands how to navigate your financial resources so that they support your most important goals and values.

[Related: In God We Trust? Bringing ‘The Force’ into Your Finances]

President Obama’s decision to create the rule is due to the fact that anyone can call themselves a financial advisor. It is a broad term that can refer to most any professional giving financial advice. A financial planner, on the other hand, must be certified by the Certified Financial Planners Board of Standards. Once they meet certification requirements, they receive a CFP designation.

A CFP has a fiduciary responsibility to act in the best interests of their clients. Financial advisors, may be encouraged by their corporations or other outside entities to direct clients to particular products with incentives like bonuses.

Whether you decide to go with a financial advisor or a CFP, there are a few things you want to check out:

  • How they get compensated: Fee-only planners do not make money on the products they sell.  You do, however, want to ask if they have relationships with outside companies that might serve as an incentive to direct you to a certain product. Fee-based planners do receive a commission on some products in addition to the money you pay them. Commission-based planners only get compensated by the companies whose products they sell.
  • How they make financial decisions: If a financial planner seems more interested in the numbers than in your personal goals and story, you may want to think twice. How would he possibly know what financial targets to pursue if he doesn’t know what he’s planning for?
  • Checks and Balances: You and your advisor or planner should be very clear on how you will measure success. You might want them to do things like compare their performance to the returns of an appropriate index or benchmark. For example, every 6 months you might want to compare the performance of your stock portfolio to the S&P 500 index. Most important, be sure that your investment choices are on track to help you achieve your financial goals. In addition, be sure that you and your financial professional are clear on how often you plan to communicate with each other.

Also, ask the prospective advisor or planner to give you the names of at least 3 clients you can call for references. Be sure to ask how accessible the planner is.