You've worked hard to save your money and grow your nest egg, so you deserve a dependable financial adviser on your side. Whether you are investing $500,000 or $5 million, you should feel confident your adviser is providing the best possible planning experience for you to meet your short- and long-term financial needs and goals.
In a field of over 300,000 registered investment advisers, not all financial advisers are created equal. You should have a collaborative relationship with a skilled and trustworthy adviser who helps you save, grow and safeguard your investments. Here are a few key tips on how to figure out if your financial adviser is looking out for your best interests or if it's time to show them the door.
No. 1: Your adviser will not put in writing that they are a fiduciary
Oftentimes there are misunderstandings about fiduciary and non-fiduciary advisers, including the standards they are required to follow. In fact, research from Personal Capital found that 48% of Americans mistakenly believe all financial advisers are required to always act in their best interests, and 65% also mistakenly believe advisers are required to make recommendations that only align with their clients' best interests.
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The U.S. Department of Labor separates financial advisers into two categories: fiduciaries and non-fiduciaries. Fiduciary advisers are registered as such, and required to put your best interests first. Non-fiduciaries, however, are not required to put you ahead of themselves. They are only required to meet a suitability standard, which states they must prove themselves and their recommendations suitable for your needs.
In its fifth-annual Value of an Advisor Study from 2019, Russell Investments calculates an adviser can deliver a 4.63% better return for clients, due to their performing annual rebalancing, stopping investors from making bad moves under pressure, planning and executing tax-smart investing. That being said, if your adviser is not a fiduciary and not held to the fiduciary standard, then it may be time to reconsider the relationship.
As an investor, how can you tell if your financial advisor is a Fiduciary? The simplest way is to ask them. They should be able to give you a simple, concise Yes and most importantly, be willing to put that in writing by signing a document based on these fiduciary standards from the National Association of Personal Financial Advisors. If they say no, ask them why not? Make sure to ask if they serve as a fiduciary at all times, as working in their client’s best interest is not something that can be turned on and off when it is counter to their own personal best interests.
No. 2: Your adviser can’t clearly explain their compensation or their value
Empower also found that 20% of clients reported not knowing how their adviser is compensated. Your adviser should be able to explain their fee structure in clear language, including how they are compensated and who pays their fees.
Fees can add up. One report found that a millennial investor paying an additional 1% fee could end up shelling out $590,000 in fees over 40 years if they start with $25,000 in a retirement account that earns 7% and add $10,000 per year.
Your financial adviser should be transparent about their fees. Be especially careful of arrangements where a financial adviser charges you a fee and farms out the portfolio management to a third party who charges a second investment management fee.
Additionally, advisers who use industry jargon to either explain their fees or to discuss your investments should raise red flags with you. Although most advisers do not intend to confuse you with technical terms, some may use jargon to avoid too many questions or protesting about fees. If they cannot explain their fees or their value to you as an investor, in language you can understand, it may be time to look for an adviser who can.
No. 3: Your adviser has a cookie-cutter style
One of the reasons you pay for a financial adviser is so you can have an expert who understands your short- and long-term goals and can adjust your portfolio and financial plan accordingly. Be wary of advisers who use cookie-cutter investment portfolios or “models,” as they often muddle the investments and do not consider which option can provide the best results for your specific goals.
Great advisers go beyond portfolio allocations and give weight to family size, asset location, tax planning, goals and your own risk tolerance. Further, your investment portfolio is just one piece of the puzzle. Your financial adviser should offer a comprehensive financial planning experience that meets and exceeds your distinct goals.
No. 4: Your adviser is out of touch
Not only do you want an adviser who understands your goals, but you need an adviser who understands what is happening in the markets and the industry. Investment markets are dynamic, and although your portfolio should not require many short-term changes, your adviser should demonstrate an understanding of the factors affecting your portfolio’s risk and return. Changing economic conditions, interest rates and the current political environment are examples of factors that can affect how your portfolio should be positioned.
A credible adviser can adjust your portfolio accordingly, as your goals, the economic environment or the industry changes. For example, as interest rates have decreased over the past 11 months, how has that affected the income produced by your portfolio, and are changes warranted to ensure you meet your income goals?
Certified Financial Planner (CFP) practitioners and Certified Financial Analysts (CFAs) are held to the fiduciary standard and are typically more in tune with the latest rules, regulations and trends. Both require extensive education and testing to receive their certification, and certification maintenance requires 30 hours of continuing education every two years.
Did Your Financial Adviser Pass the Test?
Above all else, you need an adviser who is responsive and fully engaged with your unique financial picture. If your account is frequently treated as a lower priority than a long weekend, your adviser may need to be replaced by someone who can be available when needed. As your investments grow, it becomes more imperative to make smart investments that serve you and your future.
This means holding your financial adviser to the fiduciary standard as well as your own standards, like customizing a portfolio that best benefits you and transparent two-way communication. If your adviser does not meet and exceed your standards, and you feel that they are no longer serving your best interests, then it may be time to find someone else who can.
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