Choosing a financial advisor is a major life decision that can determine your financial trajectory for years to come.
A 2020 Northwestern Mutual study found that 71% of U.S. adults admit their financial planning needs improvement. However, only 29% of Americans work with a financial advisor.1
The value of working with a financial advisor varies by person and advisors are legally prohibited from promising returns, but research suggests people who work with a financial advisor could end up with about 15% more money to spend in retirement.2 And, a recent Vanguard study found that, on average, a $500K investment would grow to over $3.4 million under the care of an advisor over 25 years, whereas the expected value from self-management would be $1.69 million, or 50% less. In other words, an advisor-managed portfolio would average 8% annualized growth over a 25-year period, compared to 5% from a self-managed portfolio.3
To help you navigate the process, we compiled a list of common mistakes people often make when choosing a financial advisor.
- Hiring an advisor who is not a fiduciary. By definition, a fiduciary is an individual who is ethically bound to act in another person’s best interest. The obligation eliminates conflict of interest concerns and makes an advisor’s advice more trustworthy.
- Hiring the first advisor you meet. While it’s tempting to hire the advisor closest to your home or the first advisor in a Google search, the decision requires more time. Take the time to interview at least a few advisors before picking the best match for you.
- Choosing an advisor with the wrong specialty. Some financial advisors specialize in retirement planning, while others are best for business owners or those with a high net worth. Some might be best for young professionals starting a family. Be sure to understand an advisor’s strengths and weaknesses before signing an agreement.
- Picking an advisor with an incompatible strategy. Each advisor has a unique strategy. Some advisors may suggest aggressive investments, while others are more conservative. If you prefer to go all in on stocks, an advisor that prefers bonds and index funds is not a great match for your style.
- Not asking about credentials. To give investment advice, financial advisors are required to pass a test. Ask the advisor about their licenses, test, and credentials. Financial advisors’ tests include the Series 7, and Series 65 or Series 66. Some advisors go a step further and become a Certified Financial Planner (CFP).
- Not understanding how they are paid. Some advisors are “fee only” and charge you a flat rate no matter what. Others charge a percentage of your assets under management. Some advisors are paid commissions by mutual funds, a serious conflict of interest. If an advisor earns more by ignoring your best interests, do not hire them.
Looking for a financial advisor? We invite you to schedule a complimentary call with an advisor in our network.