When it comes to your money, hiring a financial adviser could be one of the most important decisions you ever make.
With the right advice, you can overcome financial hurdles, make smarter investments and set yourself on the path to a comfortable, stress-free retirement. Unfortunately, some people claiming to have your best interests at heart may be trying to rip you off.
One famous example is Bernie Madoff, the Wall Street investment guru who cheated thousands of wealthy clients out of billions of dollars. But many small-time advisers are happy to simply overcharge you or sell investments that benefit only them.
Due diligence is absolutely essential when your livelihood is at stake. Here are some tips on how to find a financial adviser worthy of your trust.
Know what you’re looking for
The term “financial adviser” is extremely broad, so it’s a good idea to know exactly what you’re looking for before you start your search.
Financial advisers offers three main types of services:
Financial planning. Financial planners take into account every aspect of your financial life — including taxes, investments, insurance, retirement and estate planning — to create an all-encompassing gameplan on how to reach your financial goals.
Retirement planning. Retirement planners focus on making the right investments and financial decisions now to ensure you’ll have enough money to comfortably sustain yourself after you’ve left the workforce for good.
Investment management. Investment advisers and many stock brokers help manage your portfolio and make recommendations on what to buy and sell.
Whichever type of financial advice you need, always make sure that any adviser you’re thinking about working with has reputable credentials.
For overall financial and retirement planning services, look for a certified financial planner (CFP), a chartered financial consultant (ChFC) or a personal finance specialist (PFS). If you just want someone to manage your investments, ask to see a chartered financial analyst (CFA) certificate.
There are many more specialized options out there — for example, a certified public accountant (CPA) focuses on taxes — but any of the above will suit the needs of most people.
Understand how financial advisers are paid
How your financial adviser earns a paycheck can tell you a lot about motivations.
Commission-based advisers have an incentive to get you to spend more money so they earn a larger cut. This can create a serious conflict of interest and may lead to recommendations about products and investments that are better for them than you.
Fee-based advisers provide financial planning services for a fee but can also receive money or earn commissions on certain products, which might influence their recommendations.
Fee-only advisers should be free of bias, since they don’t earn commissions at all. Instead, they’re paid through flat fees, hourly rates or percentages of the assets they manage.
None of these options is inherently good or bad — many commission-based advisers are perfectly ethical — but the payment method should factor into your decision.
Ask where their loyalties lie
Another key question to ask is whether an adviser is a fiduciary, which means the professional is legally obligated to act in your best interest — not theirs.
Fiduciaries can only recommend investments and other financial products (life insurance, for example) that best fit your needs. They’ll only suggest the safest, cheapest or most profitable options available.
Meanwhile, other advisers are only obligated to provide “suitable” advice. The investments they recommend don’t have to be ideal choices for you but should just generally suit your financial plan.
That gives these advisers the freedom to suggest investments that earn them or their company the most money.
Do your research
Once you know what type of financial adviser you’d like to hire, take some time to research the options available.
Do a quick background check on any potential candidates, looking for any positive (or negative) reviews from clients online.
You can also look into their record with regulatory bodies like the Security and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and the CFP Board to see whether any formal complaints have been filed against them.
Keep in mind that formal complaints can stay on a financial adviser’s record for years, so a single complaint may not necessarily mean that someone is a bad option. Multiple complaints, on the other hand, is definitely not a good sign.
It’s also worth noting that you don’t need to limit yourself to experts in your ZIP code. One firm that operates online provides certified financial planners who are fee-only fiduciaries.
You may find an online CFP more convenient than choosing someone in your area, since you won’t have to travel to an office or plan your meetings around a typical 9-to-5 schedule.
Make sure you’re a good match
Once you’ve done your homework and zeroed in on a few solid candidates, you’ll want to schedule introductory meetings — either in person or online — to learn more about them.
Remember that you’re going to be discussing sensitive financial details with your adviser for years to come, so it’s important that you find someone you trust and can feel comfortable talking openly and honestly with about personal matters.
Come prepared with some questions about candidates’ education, background and experience, and be prepared to answer questions about your own immediate and long-term financial goals.
It’s also important to discuss what your communication will look like once you hire someone. How often will the two of you meet? How will you be kept informed? Is the adviser open to consultations online or over the phone?
Don’t be afraid to ask for references from previous clients and don’t feel pressured to sign anything or make a commitment during your initial meeting. If you feel uncomfortable at any point during your talk, it’s likely a sign that the two of you are not a good fit.