While there are affordable alternatives to traditional financial advisors, such as robo-advisors and online financial planning services, independent financial advisors can be valuable for managing investments. They can help you set and reach money goals and even help with estate planning. More importantly, a study by investing platform Envestnet PMC estimates that an advisor can add 3 percent value on investments each year. However, finding a financial advisor you trust is crucial for reaping the benefits, and the process requires research and thorough vetting. Here are the red flags you should watch for while seeking a financial advisor—so you can get guidance from someone who actually wants to help you build your wealth and reach your financial goals. “Not all financial advisors are fiduciaries,” says Maizes. “Therefore, they do not all have to put their client’s 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 fiduciaries. “Beware of a dually registered or a hybrid advisor. While they are registered investment advisors, they are also licensed through FINRA (Financial Industry Regulatory Authority),” Colvert warns. “They wear two hats. They can have accounts which they are acting as fiduciaries on and then have another account with the same client in which they act as brokers and only follow the suitability standard,” says Colvert. According to FINRA (a self-regulatory organization), the suitability standard only requires that an investment is suitable for the client and their personal circumstances and not necessarily one in their best interest—like the fiduciary standard regulated by the U.S. Securities and Exchange Commission (SEC). He says hybrid advisors can have many conflicts of interests, such as selling insurance products and sharing profits with mutual fund companies. “Fees vary but generally average somewhere between 1-2 percent of the total value of the investments under management, not a commission,” says Colvert. Certified financial planner Cameron Church says he left a firm because of this red flag. “It was difficult to explain to people how we got paid because being fully honest meant it was a long explanation,” says Church. “If an advisor can’t tell you how they get paid in one sentence, that’s a red flag,” he adds. Maizes says that if a financial advisor suggests a plan that emphasizes annuities, life insurance, or actions 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 taxable consequences,” she explains. An advisor who gets a commission from selling certain products or investments might not always act in your best interest, as their advice to you might vary based on their earnings. “Individuals need to determine what compensation structure best aligns with their needs,” adds Maizes. “It is essential to look at the red flags noted because these could be signs that the person offering advice has a conflict of interest, might not be giving advice that will work best for you, or is overlooking essential expertise,” says Alissa Krasner Maizes, financial planner and founder of investment advisory firm, Amplify My Wealth. In short, do your homework before making any decisions, and don’t be afraid to ask for help from experienced friends or family who have financial advisors they trust.
