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Getting Good Financial Advice? 8 Ways to Be Sure

Sept. 24, 2015
Personal Finance
Getting Good Financial Advice? 8 Ways to Be Sure
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By Gary Brand

Learn more about Gary on NerdWallet’s Ask an Advisor

Over the past year, I’ve noticed a disturbing trend among potential clients. People are coming to me with concerns about financial products they own that they do not understand. Worse, these products are not giving them the results they were led to believe they would see. This is troubling to me as certified financial planner, but it’s even more scary — and dangerous — for them.

Being informed is your best defense against such problems. Here are eight ways to make sure you are getting good financial advice that’s in your best interest.

1. Show me the money. Ask the advisor suggesting a financial product how much he or she is being paid for the sale, and who is paying.

2. Do you eat your own cooking? Ask whether the financial advisor has his or her own money invested in the product being proposed for you.

3. Check for rap sheets. Find out which agency regulates your advisor’s activity and visit that agency’s website. The Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC) and state insurance boards and securities regulators all have sites where you can find disciplinary records for advisors.

4. The pen is mightier. Insist that all recommendations and proposals be in writing. Make sure you get access to all product documentation (sample plan or portfolio, prospectus, insurance illustration, etc.) before you buy. Review the information carefully prior to purchasing a product at a subsequent meeting.

5. Danger: quicksand. Make sure you understand any potential liquidity problems with the product you are purchasing. Variable annuities, private equity real estate investment trusts (REITs) and cash value life insurance policies are examples of products that are often sold by accentuating the positive aspects of ownership while glossing over the financial penalties associated with liquidation.

6. The value of the “F” word. Work with a representative who is bound to a fiduciary standard whenever possible. Fiduciaries are required to put their clients’ interests ahead of their own. Certified financial planners and registered investment advisors are held to this standard. Insurance agents, registered representatives and brokers, by contrast, are held only to a “suitability” standard. This means that the products they sell to clients must be suitable for the clients’ age, financial situation and risk tolerance, but are not necessarily in their best interest.

7. Check the ingredients in alphabet soup. Plenty of folks hold themselves out to be “financial advisors” and “financial planners” when in reality they are just salespeople. Some of them do, however, have a multitude of designation letters after their name. If an advisor is listed as “Frank Fiduciary, ABC, DeFG, X.Y.Z.” ask him to supply you with the educational and experience requirements for each of the designations, as well as the ethics guidelines from the accrediting agency.

8. The fox guarding the chicken coop. Never let your advisor hold your investments. Instead, use an independent custodian, even if you use the advisor’s guidance to make investing decisions.

To know you’re getting the best financial advice, you must be as informed as possible about the person giving that advice. Ask questions, demand information and don’t settle for bad advice.

This article also appears on Nasdaq.

Image via iStock.

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