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How to Know If Your Financial Advisor Is for Real

Nov. 4, 2014
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By Martin A. Federici

Learn more about Martin on NerdWallet’s Ask an Advisor

If you’re thinking about hiring a financial advisor, consider: Do you know the main differences between stockbrokers, financial advisors, investment advisors, financial consultants and independent RIAs? I’m guessing many readers would say no.

If you want to find a “real” financial advisor, here are the main things to ask:

  • Would you prefer that your financial advisor be legally obligated to always act in your best financial interests, or that he or she do what is considered merely “suitable” for your financial situation (example will follow)?
  • Would you rather pay commissions to your financial advisor (and wonder if those calls to make portfolio changes are helping you more, or are simply boosting your advisor’s monthly production numbers), or pay a retainer or a percentage-based or hourly fee so there are fewer potential conflicts of interest regarding what your advisor recommends you do with your money?

Those are the only two questions you really need to ask. If the advisor is not a fiduciary—legally obligated to do what is in your best interests—you don’t even need to ask the second question. Working with a true fiduciary is key. Since the fiduciary term can apply to financial advisors, investment advisors, IARs, CFPs and so on, be sure to ask if they are always acting as a fiduciary for clients and can prove it in writing. They may not always operate in a fiduciary capacity.

Suitability is just a way of saying, “I could’ve sold you that annuity that only charged you 3.5% up front and had better investment choices, but I decided to sell you this annuity that has not quite as many good investment choices but pays me more… 5% up front instead.” Doesn’t sound too ethical, does it?

As long as the firm that the advisor works for deems that the purchase of this annuity is suitable for the client’s financial situation, there is nothing to stop the advisor from making such a transaction. Perhaps you’re wondering at this very moment if your advisor has done this to you.

Commissions can cloud the judgment of financial advisors, so it’s best to eliminate those who still are paid under this old methodology, even if it’s only part of the way they get paid. If your advisor is paid via commission for sales of financial products, it’s time to fire this person and find a real financial advisor instead.

Hiring a new advisor can be difficult, but now you’re armed with the two questions above. It just got a lot easier for you to narrow down the eligible field of qualified financial advisors, a.k.a. fiduciaries, as you seek a partner for your ongoing financial planning.

Knowledge is power. Now that you have this knowledge, hire a real financial professional and encourage others to do the same. You can help others make smarter financial decisions and make the world a better place. Feels good, doesn’t it?