3 financial advisor red flags you should watch out for


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A financial advisor can play an important role in your financial support system. But financial advice isn’t free – the average paid financial advisor charges 1% of all assets under management (AUM), and many require you to have a minimum account of $50,000 or more to qualify for their services.

Although there are affordable alternatives to traditional financial advisors such as robo-advisors and online financial planning services, independent financial advisors can be helpful in managing investments, helping you set and achieve financial goals, and even help you plan your estate. A 2019 study by investment platform, Envestnet PMC, estimates that an advisor can add 3% of value to investments each year.

However, finding a financial advisor you trust is crucial to reaping the benefits of having one. The process will likely require extensive research and verification on your part. “It is essential to look at noted red flags as they could be signs that the person offering advice has a conflict of interest, may not be giving the advice that will be best for you, or may be overlooking critical expertise,” says Alissa. Krasner Maizes. , financial planner and founder of investment advisory firm Amplify My Wealth.

Here are the red flags to watch out for when looking for a financial advisor. So you can be sure that your money is in good hands and get advice from someone who really wants to help you build your wealth and achieve your financial goals.

They are not trustees.

If a financial adviser isn’t a fiduciary — someone who is legally bound to act in your best interests and put your needs first — that’s a red flag.

“Not all financial advisors are fiduciaries,” says Maizes. “As a result, not all of them have to put their clients’ needs first, including full disclosure and transparency regarding any potential conflicts of interest,” she explains.

Look for a Registered Investment Advisor (RIA), suggests Brian Colvert, CFP and CEO of Bonfire Financial, LLC. RIAs are legally required to act as trustees. “Beware of dual-registered or hybrid advisers. Although they are registered investment advisers, they are also licensed by FINRA (Financial Industry Regulatory Authority),” warns Colvert. “They wear two hats. They may have accounts where they act as trustees and then have another account with the same client where they act as brokers and only follow the suitability standard,” says Colvert . The suitability standard, according to FINRA (a self-regulatory organization), only requires that an investment be suitable for the client and their personal circumstances, and not necessarily in their best interest, like the fiduciary standard regulated by the US Securities . and Foreign Exchange Commission (SEC).

He says hybrid advisers can have many conflicts of interest, such as selling insurance products and sharing profits with mutual fund companies.

It is unclear how the advisor makes money.

If the financial advisor doesn’t have a clear explanation of how they make money, that’s probably a red flag. This is another benefit of having a financial advisor who is a fiduciary, as they must disclose up front how they are compensated. In other words, they only make money from their fees.

“Fees vary but generally average between 1 and 2% of the total value of investments under management, not a commission,” says Colvert.

Certified Financial Planner Cameron Church says he left a company because of this red flag. “It was hard to explain to people how we were paid, because being totally honest meant it was a long explanation,” says Church. “If an advisor can’t tell you how they’re paid in one sentence, that’s a red flag,” he adds.

They are trying to sell you something.

“If an advisor tries to get you to buy or invest in something with their company name on it, I would see that as a huge red flag,” Church says. He suggests looking for an independent consultant who doesn’t get paid more for selling a particular brand.

Maizes says that if a financial adviser suggests a plan that emphasizes annuities, life insurance or stocks that would generate a lot of fees for them, that’s a red flag. “Instead, a diversified portfolio aligned with a buy-and-hold approach of investing in low-cost investment vehicles like mutual funds and ETFs generates fewer fees and tax consequences,” she explains.

An advisor who receives a commission from the sale of certain products or investments may not always act in your best interests, as the advice they give you may vary depending on their income. “Individuals need to determine which compensation structure best suits their needs,” adds Maizes.

Before going ahead with an advisor, be sure to check them out on SEC Investment Advisor Public Disclosure and FINRA BrokerCheck to make sure they are legit and learn more about their qualifications and qualifications. state records. You can also check the SEC’s litigation database to see if the adviser has any lawsuits against them.


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