For many people, hiring a financial professional is a choice, rather than a necessity.
If you have the knowledge to do your own financial planning, tax preparation and/or investing, you can choose whether or not to do it yourself. Part of that decision is determining the highest and best use of your time. Doing the job of a financial or tax adviser, at least doing it well, requires a significant commitment of time and energy, both of which are limited and precious. Most people would rather spend that time on family, travel, hobbies, or volunteer work. If you’re in that camp, and need to find a financial or tax adviser, here are some common mistakes people make—and how to avoid them.
1. Not making a decision
Indecision—i.e., choosing not to make a decision—is like selecting “none of the above” on a test question, and can often be an impediment to financial success. This is as true when choosing an adviser as it is to sound investing. Many people let too much money sit in cash, or fail to rebalance their investment portfolios periodically, because they are waiting for the “right” time to make a change. Indeed, an inability to act (due to procrastination or indecision) is one reason many people choose to hire a professional financial adviser, who can eliminate the emotional element and use a disciplined approach to make decisions and take action as needed.
A professional financial adviser or planner will actually help guide you through the decision-making process, assisting you in determining the approach and allocation that best suits your needs, circumstances and goals. Once you agree together on risk and strategy constraints, you can choose whether or not to delegate day-to-day purchase and sale decisions to that adviser (or firm) by giving them “discretionary” authority. Either way, they should help you quantify your needs, decide on a plan of action…and set it in motion.
2. Not asking for referrals
If you are serious about hiring a financial professional, ask for recommendations from people you respect, such as work colleagues, friends, and professionals in related industries (e.g., an estate-planning attorney or insurance agent). If the idea of asking for a referral makes you uncomfortable, here are some questions to help you get the information you need, without divulging much about your own situation:
•Are you happy with the service you receive from your adviser?
•What exactly does that adviser do that you think they are good/best at? (Make sure that the capacity in which they excel is the one you need.)
•What made you select them over competitors?
•Do they respond in a timely manner and communicate in a way that makes you feel comfortable?
•Does working with them help you sleep better at night?
Bear in mind that tax laws, financial markets and the economy are beyond any adviser’s control. Focus, therefore, on the things that are in their control, such as service, responsiveness, and communication.
3. Assuming what a title or credential means
While no one can call themselves a “CPA” without considerable education and testing, literally anyone licensed to sell financial products (insurance, mutual funds, etc.) can call themselves a “financial adviser” or “wealth manager.” Similarly, certain credentials can be obtained by simply spending a few hours or a weekend taking a course, whereas others, including “CPA” (Certified Public Accountant) and “CFP” (Certified Financial Planner practitioner), require many months or even years of study, rigorous testing, and ongoing continuing education.
Almost all financial advisers follow one of three paths to become licensed to give you advice:
1.As a salesperson/registered representative (RR) of a broker-dealer;
2.As an insurance agent for an insurance company; or
3.As an adviser with a Registered Investment Advisor (RIA) firm.
All three can call themselves “financial advisers,” but there are important differences. RRs and insurance agents generally make most (or all) of their money via commissions, either for selling you products (mutual funds, insurance, annuities, etc.), or each time you buy or sell a stock or bond. RIAs, on the other hand, receive fees for their services, and serve as fiduciaries (we’ll discuss what that means momentarily).
It is important, therefore, that you not assume that an impressive-sounding title or credential means what it seems to imply. Instead, ask potential advisers exactly what it took to get their particular title or credentials, as well as how much experience they have in providing the type of services you need from them.
Not focusing on relevant experience
A common mistake is to only consider advisers who are older, rather than seeking an adviser with experience that is relevant to your situation and needs. It’s easy to assume that gray hair (or a lack of hair) equates to experience. However, it might just reflect age, with many of those years spent doing things other than providing the service you need.
Here are two sources of information (including years of experience) for financial advisers and tax professionals:
Investment Advisor Search: https://adviserinfo.sec.gov/
Credentialed Tax Return Preparers: https://irs.treasury.gov/rpo/rpo.jsf
A “millennial” with years of experience as a financial planner may not have nearly the life experience you have, but if they have spent years working with other families similar to yours, they might have great insight into planning for your future. One advantage of younger advisers—or advisers that work as a team—is that they are more likely to outlive you, so they can advise you and your family, and adapt your finances to future laws and economic environments, for decades to come.
5. Ignoring conflicts of interest
The investment industry is full of conflicts of interest, and they usually center around compensation. A registered representative (RR) or insurance agent can make 10 times as much commission if they get you to buy one thing versus another. Advisors with a Registered Investment Advisor (RIA), on the other hand, get paid the same amount regardless of which investments they recommend, so they have no incentive to push one over the other.
Financial advisers usually fall under one of three compensation structures:
•Fee-only. These advisers only make money via fees (e.g., for financial planning and/or ongoing asset management, based on the value of your portfolio). They do not accept commissions for investments you purchase. Such firms are generally Registered Investment Advisors (RIAs), and that makes their advisers fiduciaries (and therefore legally required to do/recommend only what is in your best interest).
•Commission. This applies to most brokerage firm Registered Representatives and insurance agents. These advisers face strong incentives to recommend investments that pay them (and their firms) the most. They are not fiduciaries, so they merely need to be able to justify that something they sold you was “suitable” (not necessarily best) for you. Regulators have long sought to make RRs and insurance agents subject to the fiduciary standard, but big banks, brokerage firms and insurance companies have powerful lobbies, and they’ve fought tooth and nail—successfully thus far—to prevent it.
•Fee-based. A sort of hybrid of the other two, these advisers charge a fee for some services (e.g., financial planning or ongoing asset management), but they also receive commissions for things they get you to buy (such as limited partnerships, annuities and certain mutual funds), so they wear two very different hats.
It is certainly possible that a given adviser under any of these compensation structures would give you good advice. But commission and fee-based advisers face inherent (and pretty hard-to-ignore) conflicts of interest. The key is that you need to understand the extent to which their advice might be influenced by such conflicts. So ask this question:
“What percent of your income comes from commissions vs. from fees?”
As a rule, the more that is from fees, the better. Here are a few red flags to watch for and ask about.
Some red flags
Be sure to look out for payment systems similar to those below. These are common methods used by advisers to charge you more in feed than is necessary.
1.Advisor sells their own funds—they get paid twice: once for selling their advice and again for selling a company owned fund
2.Advisors collects a fee for nothing—you pay them to manage your assets and again to access a particular portfolio
3.Advisor charges consulting fees—these fees are usually funded by companies to encourage the sale of their own product.
6. Not considering the team
Regardless of an individual adviser’s age and experience, it is important for you to know the extent to which he or she works with/as a team. No one can know everything, so it is important that your adviser have access to a broad knowledge base via collaboration with other experienced professionals.
Teams allow for many related specialties. For example, a team might include a dedicated financial planner, an investment manager, tax and accounting professionals, estate-planning specialists, and even concierge services. Since no one adviser can be an expert in all areas, having a team with a broad mix of age, experience, and specialties can be extremely advantageous.
7. Accepting a ‘black box’ attitude
Good advisers want you to understand what they’re doing and why. Many advisers, however, act like you can’t possibly understand what they’re doing—it’s like a “black box” in which magic occurs; they’re the experts so you should just give them your money and trust them. That attitude should be a red flag. The one thing you cannot delegate away is the responsibility for making sure that risks being taken on your behalf (with your money!) are appropriate for you. Even if you don’t want to know the details, your financial adviser should want you to understand their methodology and risk mitigation disciplines. They should also gladly answer any questions you have about specific security purchases or sales.
8. Not trusting your gut
The theoretical “ideal” financial adviser is someone who can think like you, putting themselves in your shoes—with your interests, concerns and goals—while simultaneously using their (and their team’s) expertise to advise you. Of course, no one can think exactly like you, but the closer the better. A good adviser should make recommendations that they truly believe are appropriate (and best) for your circumstances, needs, goals and psychological makeup (including tolerance for risk).
Once you’ve done your research and found a few viable candidates, you should—believe it or not—follow your feelings. They will likely lead you to make the right call.
So, here’s what the entire adviser selection process looks like:
First, after getting recommendations from people you know and respect, evaluate potential advisers’ technical skills, background and abilities.
Ask yourself the following questions:
•Do you feel comfortable that their knowledge, education, licensing and certifications, and relevant experience—as well as their commitment to stay informed—will satisfy your current and ongoing requirements?
•Is there enough depth in the adviser’s team to provide the range of services, hours of operation, communication, and specialties you require?
•Are you comfortable that they are acting in your best interest, not their own? How are they compensated? Are they acting as fiduciaries?
•Can they “think like you” (put themselves in your shoes)? Did they take enough time learning about you, your family and your feelings (concerns, fears and dreams)?
•Do they want you to understand what they’re doing for you?
•Last, but definitely not least, which of your candidates do you trust the most? You’re likely to be turning over to them a great deal of confidential financial information and, in the case of financial advisers, some or all of your life’s savings to manage. Trust is paramount. After considering everything else, at the end of the day you should follow your gut.
Adriel Tam and Bruce Yates are founding shareholders of Viridian Advisors, an SEC Registered Investment Advisor that offers fiduciary investment management and financial planning services. Their group also provides tax, accounting, and assurance services through its sister company, Viridian Tax and Accounting.
Source : MTV
