Can I Trust a Financial Advisor?

by Andrea Kornstein

A man in front of a computer with the notebook

It took a while, but you’ve finally come to terms with the fact that you’re a full-fledged adult. And with this newfound recognition, you decided to embrace fiscal responsibility. You want to start paying down your debts, saving for a down payment and invest in retirement accounts. There’s just one glaring problem: you’re not sure where to begin. Fortunately, you can enlist the services of a financial advisor to help you manage your money. 

Of course, making the decision to work with a finance professional is often easier than finding someone to hire. There are many individuals who lay claim to this industry, after all. This leads to the obvious question — how do you even know if you’ve found a trustworthy financial advisor?

The first step is to understand that there are two categories of advisor: fiduciary and non-fiduciary:

A fiduciary is a person who is obligated to act in your best interest. They must recommend investment strategies that would be beneficial to you. They act in good faith and disclose any potential conflict of interest. Most fiduciaries have also taken the extra step to become Certified Financial Planners® and only charge a flat fee.

A non-fiduciary is a person who only needs to meet suitability standards. This means that they only have to recommend investment options that are suitable for you. They do take into consideration your financial goals and ensure you won’t incur excessive costs. However, they may still recommend moves that aren’t wholly in your best interest, or ones where they stand to benefit more than you. 

Who might fall into the category of non-fiduciary?

Generally speaking, titles for non-fiduciaries are not regulated. They can designate themselves financial planners, insurance agents, brokers, investment advisors or financial consultants. Moreover, non-fiduciaries don’t typically hold any special certifications. And they often make money (via commission) by selling their clients investments tools designed by their employer. 

Who are these employers? It could be a bank, brokerage firm, credit union, or insurance company. And these institutions often expect their employees to sell these products, irrespective of whether it’s actually in their client’s best interest. 

Why would someone opt to remain a non-fiduciary? 

Simon Brady CFP®, CDFA® posits that it could be an individual who doesn’t “want to put in the study and effort required to get certified.” He also speculates that “they [might] think potential clients don’t really know the difference [and that]…it’s an easier path to personal riches.”

Of course, that doesn’t mean that you must immediately steer clear of anyone who is not a fiduciary. There are definitely some trustworthy planners and brokers in the industry. You just need to make sure you’re diligent in your research. To that end, we’ve put together a few questions to ask yourself as you assess any financial advisor:

Does your advisor try to educate you?

A trustworthy financial advisor doesn’t merely pepper their conversation with industry jargon to assert their authority or demonstrate their knowledge. Instead, they make a point of thoroughly explaining your investment options and reviewing the pros and cons of each. They help you make educated decisions rather than dictating your choices and insisting you follow blindly.

Is your advisor tailoring their advice to your goals? 

You should work with an advisor capable of fostering a strong relationship with you, no matter if you’re meeting for a one-off session or aiming for a long-term partnership. Hire a person who actively listens and inquires about your personal and professional goals. Conversely, steer clear of anyone who makes aggressive suggestions after only a brief conversation. It’s highly unlikely that they’ll be a trustworthy financial advisor. 

Do you have a clear breakdown of the fees you’re paying?

Even if they’re only beholden to the suitability standard, a trustworthy financial advisor won’t hesitate to clarify the fees you incur. They will be open and upfront about your charges and the specific ways they are earning their paycheck. 

Do you understand the risk in your investments?

There’s an inherent gamble to all investing. However, some ventures are safer bets than others. Is your financial advisor downplaying the risks? Are they pushing you towards investments that make you uncomfortable? If they’re dismissive of your concerns or seem averse to discussing them, it’s probably best to move on. Now’s probably a good time to remind you that fiduciaries operate on a fee-only policy. They’ll never direct you towards a financial product simply because they can make money off of it.

Not all non-fiduciary advisors are dishonest or unreliable. You can certainly find some with whom you’d work well. Nevertheless, Brady cautions that “there is not really a best type of non-fiduciary advisor.” And he concludes that “the moment your advice becomes tainted by the fact that you are paid according to sales numbers of a certain selection of products over others and you are given a sales quota, you can no longer claim to be working in the best interests of the client…You are a fiduciary at all times or you are not.” 

My Financial Counsel Can Help

Don’t worry if you’re wary of working non-fiduciary advisors after reading this. You can always turn to My Financial Counsel for assistance. We can pair you with a fiduciary advisor who is guaranteed to act in your best interest. To get started, take our free, confidential survey here.

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