
Hiring a financial advisor is a wise call for many investors who may find that they’re in way over their heads. Undoubtedly, it takes a lot of time, effort, and experience to become as financially savvy as a seasoned financial pro. And for many, it’s just better to spend money on a fiduciary that can not only help you make the smart financial plans, regardless of where you’re at in your journey but also share some words of wisdom that will stay with you when you’re finally confident enough to take on retirement on your own.
However, if you’re not hiring a fiduciary, or someone who’s obligated to put you, their client, above everyone including themselves, there are some potential red flags that may signal it’s time to find another financial advisor. Of course, not every “non-fiduciary” is just trying to use you to score a sweet commission. However, it’s absolutely vital to know where one’s incentives lie so that you can call out conflicts of interest should they arise at any given point (especially during the fund selection process).
Key Points
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There are plenty of red flags to keep tabs on if dealing with a new advisor.
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Your financial advisor isn’t quite explaining things — in plain language — to you.
In any case, chatting with your financial advisor should result in an active and engaging back-and-forth conversation, rather than doing whatever your advisor says without context or understanding. By having the discussions and asking plenty of questions, your advisor will get to know you a bit better and have a better idea of what type of investor you are and the types of investment instruments you’d be most interested in.
Whether you’re extremely cautious (annuities, bonds and CDs), aggressive (high-growth stocks and high-tech ETFs), or somewhere in between, they should be able to know your risk tolerance by conversing with you. And it goes above and beyond just taking a questionnaire!
They’re aggressively pushing actively-managed mutual funds that “beat the market.”
Indeed, fees should be at the top of mind when dealing with a financial advisor. When dealing with an advisor who’s not a fiduciary, you must also watch out for the recommendation of high-fee mutual funds — something I warned of in prior pieces. Though not always, it’s often in the best interest of some advisors to get you to pay for a pricier product that may have markedly cheaper alternatives.
Indeed, actively-managed mutual funds tend to come with heftier fees. And while the value of active management may be up for debate, the fact of the matter is that higher fees are often not worth the (small) chance of beating the market.
Of course, you can tell them directly that you’re fine with a market return and seek a lower-fee index alternative (let’s say an S&P 500 index fund). If, however, they’re still pushing high-fee funds and trying to convince you that active management is always worth the extra fees, it may be time to shop for another advisor, as they could be at risk of telling untruths in an attempt to sell you something that would net them more commission.
Active management can make sense for some, but you should be on alert if the expense ratios you’re paying are markedly above the averages (think 2-3%).
The bottom line
When finding an advisor, communication and chemistry are incredibly important, as are their best interests. If you’re dealing with an advisor who’s not willing to listen and is trying to push high-fee funds because they’re telling you they have a history of beating the market (they should be telling you that the past is no guarantee of future performance), it may be time to start looking elsewhere.
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