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Whether through a friend of a friend or on FinTok, there are a lot of ways to find a financial advisor these days. Picking the right person for your needs is a different story.
“If you can’t make a connection, chances are the advice might be a little sterile because it’s not about you,” said Paul Brahim, a certified financial planner and president of the Financial Planning Association.
Fortunately, there are some tried-and-true rules for vetting a financial professional, as well as a few key red flags to watch out for.
Before initiating what could be one of your most important relationships, here are those warning signs, according to experts.
Red flag: Questions about credentials
For starters, a financial professional must be qualified to make sound decisions to help you reach your personal and financial goals.
To that end, some advisors are bound by the fiduciary standard, which means that they are required to act in your best interest. Otherwise, financial planners and investment advisors may recommend investments that fit your needs under a less strict suitability standard.
“Certified financial planners, at least from a code of ethics perspective, have the highest fiduciary standing,” said Brahim.
To verify a CFP’s background, go to the CFP Board’s website. Brokers and brokerage firms can be looked up on the Financial Industry Regulatory Authority site and investment advisors can be checked out on through the U.S. Securities and Exchange Commission’s Investment Adviser Public Disclosure, or IAPD.
“You can learn a lot about the person” by doing a quick check, said Gerri Walsh, president of the Financial Industry Regulatory Authority, known as FINRA. That includes how long they have been in the industry and whether they have bounced around from firm to firm, “which is not necessarily a red flag but could be a yellow flag for you to consider.”
FINRA’s online Broker Check also includes complaints by customers against registered investment professionals. Complaints are not necessarily deal breakers either, Walsh said; however, a minor records violation is one thing, and unauthorized trading may be another.
Red flag: Lack of transparency
There are different ways advisors earn money, but another red flag is “if there is a lack of transparency around fees,” Brahim said.
“It’s important to understand the form of compensation and the total cost,” Brahim said. Also, an advisor should be able to articulate that “pretty quickly.”
The “norm” tends to be a fee based on assets under management, according to Walsh, but that doesn’t mean that’s right for everyone. For example, “if you have $100,000 and you are paying 2%, are you getting $2,000 of value? You might be better off with a fee-for-services model.”
In that case, you may pay a flat fee or an hourly rate or even a combination of the two. But advisors could also earn a commission based on the transactions they make, or products they sell.
“You want to make sure you understand how the investment professional gets paid and how you pay them — those are two different things,” Walsh said.
Red flag: You wouldn’t swipe right
Although you don’t have to love your financial advisor, it’s generally a green flag if you do.
“We become part of each other’s lives,” Brahim said. “It should be a long-term collaborative relationship; it’s not just about math.”
Just like when dating, a prospective advisor should be asking you questions about your life at the outset — “a lot of folks in our industry will start talking about themselves, that’s a red flag,” Brahim added. It helps if they have an understanding, broadly, of who you are and some experience with others in your field. “Have they seen your scenario a time or two in the past?”
Still, no two relationships are the same.
To that end, Walsh said, share all of your goals — whether that’s saving for a home, college or retirement — as well as challenges and financial constraints you face, such as caring for an aging parent.
“Your goals are going to be unique to you,” Walsh said. “Your circumstances are going to be different and your capacity to absorb risk.”
Red flag: Products come before planning
According to Brahim, another red flag is if “someone is simply pitching an idea for an investment or an insurance product without having clarity around your goals and objectives.”
A good advisor should know that your interests come first, with a thorough assessment of your financial situation, he said. “The recommendations for products emerge from the financial plan, they don’t come before the financial plan.”
Pitching products early on could indicate that you are dealing with a salesperson rather than an advisor acting in your best interest.
In fact, anytime someone is leaning on you to make a particular investment or quickly decide on a sale or purchase, “take a step back,” Walsh said. “Pressure can be a red flag of inappropriate behavior or potentially fraud.”
