The world of financial advising is a world of sales, so it is in your best interested to learn how to avoid a scam artist financial advisor. Now don’t get me wrong. There are plenty of upstanding citizens that work in the financial advice industry, however, given its strong reliance on sales and commission based pay structures, many times advisors have their own self-interest ahead of their clients. This is the type of advisor that you want to avoid.
In order to avoid being scammed by a financial professional, you will want to make sure that you interview them to be your advisor, not the other way around. If you take the time to do your due diligence on a potential financial planner, you will find yourself in a much better position down the road. Quality financial planning is paramount for a long healthy financial life. It is our mission here to make sure that you get that quality financial planning, and not a quick sales rap and no follow up. Made for insiders in the financial advising world, Scott West has a great book detailing exactly how financial advisors operate called, Storyselling for Financial Advisors : How Top Producers Sell.
Check Out Their Background: Think about the first thing an employer does when you interview for a job. They check your background. Where do they start? Education. You need to make sure that the financial advisor that you are meeting with has the education necessary to do the job effectively. So what should you look for? You will want somebody who has a Series 7 license, a CFP® designation and a four year degree in a business related field.
Check Out Their Company: Does this advisor work for one of the big brokerage houses? Morgan Stanley, Merrill Lynch, Fidelity Investments, Lincoln Financial? When you hear a name like this behind the advisor that you are meeting with, it speaks volumes. These firms are generally pretty discerning when it comes to their hiring practices. If the firm is some place that you have never heard of, don’t automatically shut the person down. You may just need to do some further research to determine whether they are backed by a reputable financial firm. Ask around, Google it etc.
How Long Have They Been In Business: Make no mistake about it, financial advisors work for themselves. They are independent sales representatives handling their own book of business. The turnover rate therefore is generally very high, as advisors hit dry spells and move on to a job with more consistent earnings potential. You want a financial planner that has been in the business for 10 years atleast. If they have made it that far then they are lifers. You want a lifer. The last thing you want is for your advisor to change every year or two.
How Are They Compensated: Financial planners are generally compensated in one of three ways, Fee Only, Fee Based and Commission Only. When looking for an advisor, I generally prefer the Fee Only model and I will tell you why. Fee only financial advisors provide their clients with a consultative approach to managing their financial future. This approach requires that the financial advisor create value so as to validate the hourly wage that they charge for their services. Fee Based financial planners generate income through consultative style fees as well as commissions on products sold. I am always wary of commission based models. In this case, commission is not the only revenue producing part of the advisor’s income, so it is less of a concern than our next model, Commission Only. A Commission Only advisor is compensated only on the commission paid for products sold. In this scenario, I found that many financial advisors will confuse their financial goals with the goals of their clients. Certain products naturally have higher price tags, and therefore, higher commission payouts. Are these products always the best for the client? Certainly not. However, they are suggested far more often then their cheaper alternatives. See why you have to ask about an advisor’s compensation methodology?
Get Some Referrals: Referrals are like gold, both to the advisor and to prospective clients (you). Reach out to the financial planner’s referrals that he or she has provided to you. Ask them questions about the person’s business habits. Are they punctual, do they reply to emails promptly, do they cancel appointments etc. You want to also ask about what the person believes they could improve upon. Ask if the client would be comfortable referring this advisor to a colleague at their office. You can learn a lot about a person by what their clients have to say about them.
Confirm Who You Will Be Working With: Many financial advisors who have been in the business for a number of years have a staff of younger advisors working beneath them. In many cases, the initial sales call will be handled by the senior advisor, while the rest of the relationship may be managed by a younger associate with far less knowledge, both of the industry and your financial situation. Always confirm that your account will be managed by the person that you met with and not some early 20’s right out of college kid without a lick of experience. When I started in financial advising I was 22 years old. I worked under an experienced advisor who had been in the business for 8 years. He would always go out and sell the prospects on the first or second call. Once they were closed it was my job to put together their plan and follow up with them on any product changes going forward. I knew nothing. Literally, nothing. Yet I was handling important decisions that were far above my experience grade. Do not let your advisor get away with this type of hierarchical method of doing business. You really want to make sure that the financial advisor is worth the money.
Let’s Review: Always be sure to interview the financial planner, not be interviewed. You will pay this person for their services so make sure of a few things: Their background, their education, their certifications, their length of time in the business. Also check up on their compensation methods as well as who you will be working with going forward. Once you put all of these things together, you will be on the right track to making an informed decision in hiring a financial planner.