While it can be a great idea to get professional help with your family's finances, be careful who you trust to give you financial advice. The financial service industry is rife with misleading information and a lack of transparency, and far too many people put their faith in a "professional" financial advisor to manage their money without understanding the advisor's qualifications (or lack thereof), how much it's costing them and what the alternatives are.
Before you sign on to work with a financial advisor, be aware of these five things they may not be telling you.
1. The financial advisor title doesn't mean they know anything about finances
While many things in the financial industry are heavily regulated, the term "financial advisor" is not one of them. There are no qualifications you have to meet to call yourself a financial advisor. You can go to college and major in basket-weaving - or not go to college at all - and call yourself a financial advisor.
Be sure to ask about the advisor's background. What (if anything) qualifies the advisor to give you financial advice?
2. You're paying too much in fees
When you purchase most things in life, you have to write a check, get cash out of your wallet, or swipe your credit card. Not with investment fees. In most cases, the fee will come right out of your investment account, and might be hard to decipher on your statement.
To add to the confusion, there is no industry standard for how fees are structured. Some advisors charge a fee based on a percent of assets they are managing. Others charge a fee each time they buy or sell stocks or bonds in your account. Some (although very few) charge a flat fee. Other advisors will receive their fee in the form of a commission from a financial product or fund they put your money into.
On top of the fee paid directly to the financial advisor, you will also pay a fee for any investment fund or investment product the advisor invests your money in. If the advisor is getting paid a commission for these investments, be particularly vigilant of the fees you are paying to the fund or other investment. If an advisor tells you they won't charge you anything to manage your money, keep in mind that there's no such thing as a free lunch.
If the advisor isn't getting paid by you, they are getting paid by the funds where the advisor invests your money. Usually, this means you are paying a high fee for those investments. Be especially wary of annuities or other complex financial products that can mask outsized fees.
There are generally two levels of fees: the fee paid to your financial advisor and the fee paid to the funds where they will be investing your money. Ask the advisor what fees you will be paying directly to the advisor and what fees you'll be paying for the funds that your assets would be invested in. Ask if there are any other costs or fees related to your investments.
3. They're a salesperson in disguise
If an advisor is receiving a commission from products they are putting your money into, they have no legal duty to act in your best interest. It is perfectly legal for them to recommend a fund that will pay them a higher commission, even if a similar fund would be less expensive for you. That's why it's so important to understand all of the fees you're paying (see above) - not just the fee that goes directly to your advisor. If an advisor is getting paid based on commissions, he or she may be more likely to recommend a more expensive investment.
Ask the advisor if they have a fiduciary duty to you. If not, treat the advice they give you the same as you would from any other salesman, and shop around.
4. Those letters after their name don't actually mean anything
If you look at a financial advisor's business card, there's likely to be a long list of letters after it, making the advisor appear highly-credentialed. In some cases, that person is also highly qualified. Having multiple credentials can be a sign that the advisor is knowledgeable and up-to-date on a particular topic. Some credentials, such as the CFA, CFP®, and CPA, require significant coursework and passing a multi-day, challenging exam. In some instances, however, letters after an advisor's name mean little more than that they paid a fee and sat through a simple online course.
Don't let impressive-sounding credentials fool you. Before relying on an advisor's credentials, find out what is required to obtain them, and check the credentialing organization's website to be sure that the advisor is a member in good standing. And don't hire an advisor based on those credentials alone. Consider the advisor's other qualifications, such as his or her education, time in the profession and experience with your type of situation.
If a financial advisor calls you with a "great stock tip," be wary. The chance that your advisor will maximize your returns by picking individual stocks is extremely low. Even the best stock-pickers in the business - who have legions of analysts working for them - have a hard time beating a low-cost index fund that tracks the overall stock market. And, unlike mutual funds, individual advisors are not required to track their performance - so they can't tell you whether their prior ventures into stock-picking hit it out of the park or (more likely) woefully underperformed.
Don't rely on a financial advisor to choose individual stocks. An advisor can help you choose low-cost index funds or mutual funds, which are a far safer - and smarter - way to invest your money.