The 5 most common mistakes when hiring a financial advisor

I read a study that said many people would rather go to the dentist, than go to the financial advisor. Talking about your finances with a stranger can be pretty challenging. And it becomes more difficult when you don’t know how to select a professional who can cater to your needs. In general, the professional relationship with a financial advisor is like that of your family doctor. One that will surely last for many years. And which, after so many years, is challenging to get rid of. Because you will indeed have already gotten used to it.

Therefore, you must have the correct tools to choose the advisor or financial planner that best suits you. Or at least detect the most common mistakes people make when hiring an advisor. It’s crucial to understand the importance of a fiduciary relationship. Where the advisor is legally obligated to act in your best interest.

a) Active investment: 

The advisor determines which assets (stocks or bonds) can achieve the best results and creates a portfolio. In this case, it is always important to validate if. For the level of risk you are taking: you are receiving returns that are worth it.

Likewise, if you pay for an active portfolio and see that time passes and you still have the same stocks or bonds, and there is no alignment between what you requested and what you received, it may be time to reconsider. Various studies show that these methodologies fail to be successful over time because it is very complex for a person to continually determine the winning action or investment, and financial products with high commissions are usually used.

b) Passive investment:

Under this investment modality, the advisor builds a portfolio using index funds or what are called ETFs (Exchange Traded Funds). Which allows them to have a broad diversification at low cost and depending on their profile as a client and The goals you want to achieve, your investment will be made up more of stocks or bonds.

This investment methodology is based on the findings of several Nobel Prize winners it points out that as long as you have a diversified portfolio and maintain the proportion of assets where you invested over time, you will benefit from the creation of continuous value for companies. If one of them fails, you have all the others left. Despite being called Passive, as we mentioned:

Your advisor’s job is to verify that the recipe of your portfolio does not change over time and. For example:

Is maintained as long as you have a cup of stocks and a teaspoon of emerging market bonds. And that this does not happen. When time passes and you review your portfolio: you have a cup of emerging bonds and a teaspoon of emerging market bonds. This is where, for your friend, the active methodology is appropriate. Still, you are looking instead for a passive portfolio for your family goals.

2. Not asking how much financial advice costs or not having a reference price:

Clients looking for a financial advisor want to make money and seek the best performance, but they sometimes forget that the most important thing is understanding the net return, which results from subtracting it from their performance. The commission that the advisor will charge you.

a) Commissions for the sale of financial products:

These are the most dangerous because they can generate an apparent conflict of interest, where the advisor could be tempted to sell you products that are better for him instead of for you. Until a few years ago, it was the scheme most seen in large investment banks. In some cases, it continues to be the one applied by many insurance companies that offer investment products. These commissions can be high, far exceeding 5%, and for investment products with insurance, it can be more than 50%

b) The percentage commission on the amount of money or investment portfolio that the advisor manages for you:

This has been one of the modalities that has been growing par excellence in the financial industry. Given that it is a percentage calculated on the amount of money you have with the advisor. Your interests are aligned. The advisor wants you to do better so that things go better for him too. The average commission for managed assets is around 1%. And it is usual for this commission: To be lower as the advisor manages a more significant amount of funds for you.

c) Commissions charged by the advisor on a Flat or Fixed basis:

This modality has been growing in the market. In recent years, you have seen financial planners who charge you a fixed amount or an amount for the hours they dedicate to your project, similar to how an accountant or a lawyer charges. It is ideal for clients who want a review or a second opinion or even those who do not have an investment portfolio but are working to build their savings over time and enjoy a guide to achieve it. The cost will depend on the level of preparation of the financial advisor or planner and can range from $100 to amounts above $600. When it comes to a particular project, the price can be from $2500 to $8000.

3. A financial advisor and a financial planner are the same things, right?

Many people use the following words interchangeably, and they are different: Financial advisor, financial Planner, financial coach, financial consultant, or wealth advisor. Why is it essential for you to understand what a Financial Advisor does versus a Financial Planner? And, why is it even more vital that you know what value it has for the Planner to obtain a Certification?

Usually, when discussing a financial advisor, we refer to a specialist who will help you invest your investment portfolio according to the abovementioned methodologies. But, when we talk about a financial planner, traditionally, it will be a professional who will see your finances more globally. Not only worrying about your investment portfolio but also seeing other aspects of your finances and financial goals such as tax planning, cash flow, debt optimization, succession planning, donations, and retirement plans.

Being a certified financial planner will allow you to have peace of mind knowing that this professional has taken an oath always to offer you what is best for you, leaving aside their
interest.

They will have had to comply with an extensive educational and continuous preparation program. This is one of the main mistakes made by people who do not know these differences and end up hiring a specialist who offers less for many times the same price and, in some cases, will not ensure that they provide you with what is best for you.

4. If the financial advisor belongs to one of the large investment banks, it is much better, right?

Usually, you have the fantasy of believing that if you have a financial advisor from one of the largest investment banks, you have the best service. This is mainly invalid when the amount of money the advisor manages for you is not essential. One of the most common complaints clients of these large groups have is that they say their advisor was always available during the sale. They felt like they laid out a red welcome carpet for them, but subsequently, there was no way to contact the advisor, and care was no longer the same.

Only some clients know these advisors have very aggressive sales goals. They receive so many clients that what incentivizes them. And drives their performance bonus is the collection of funds or money from clients at the highest level. Speed means that the advisor continually changes over time as this professional acquires more clients. Or moves on to work with another financial group.

Therefore, it is often better to be in smaller investment advisory firms where you can meet the owner. And know that they will do everything to serve you better because, in them, you are an essential client for their income.

5. Your investment portfolio needs to give the expected result, and you have decided to change your financial advisor.

This point must be looked at very carefully. Since another investment advisor will always be able to tell you that the previous advisor did everything wrong. Which is why your portfolio does not perform as expected. Our main suggestion is:

If the stock market is falling and your portfolio is also typical for your balance to go down. Now if you see that the market is going up. Your portfolio is not going up; that is not a normal situation. Look carefully. 

It does not move like the market, but I am not saying that you invested an amount. The market went down, and although it has risen, you still have not recovered the amount you originally had. In this case, the moment in which you invested your money is the significant factor that: Determines whether you will be able to recover your balance in the face of market movements. As well as whether your advisor rebalanced your portfolio before these fluctuations. So that when the internal pieces change in value, your proportions are maintained.

Your investment advisor must provide continuing education through: Blogs, videos, or material that gives you a general overview of what pieces make up your portfolio, their cost. And why those pieces are used and not others. This way, you will know if your portfolio has not increased due to a problem with the advisor’s performance. Or simply because the pieces you use are inappropriate or not aligned with your investor profile.

By understanding these key points and seeking guidance from certified financial professionals, you can make more informed decisions about your financial future. It’s essential to know that many Certified Financial Planners offer Hourly Financial Planning services, which can be an excellent option for those looking for flexible and tailored
financial advice.

Alonso Rodriguez Segarra (CFP)

At Advise Financial, we provide a service guarantee for hourly financial planning solutions, where if we are unable to add value above the amount you paid us for fees, we will refund your money.