Hiring the wrong financial adviser could be detrimental to your savings.
That’s why the Securities and Exchange Commission, in honor of National Financial Capability Month, warned this week that investors be very careful before hiring an investment professional. National Financial Capability Month “provides an opportunity to remind investors of the work they must do to help themselves make smart investment decisions,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy.
A financial adviser should always act in your best interest — and a government rule that would require that is currently in limbo.
Signs of a bad actor include an adviser who pitches a complicated financial product without explaining it or being unclear about how he or she is being paid. Case in point: Beware of “reverse churning” where an adviser puts clients’ money in an account that charges an ongoing fee, but provides little advice in exchange. Fee-based accounts aren’t always a bad idea, but they don’t make financial sense for investors who do little actual trading.
Some advisers make money through commissions on the products they recommend, while others charge based on the amount of assets under management. Financial advisers can charge somewhere between 1% to 2% of total assets under management, according to personal finance site NerdWallet.
See: Is your financial adviser in the ‘hidden fee’ hall of shame?
Here’s what to do to find the right adviser:
What are their credentials? Do they really have them?
The SEC advises investors to check the backgrounds of any financial adviser they intend to work with, and to make sure that person is licensed. “Unlicensed, unregistered persons commit much of the investment fraud in the United States,” the agency said.
There are a few ways to check: The SEC’s Investment Adviser Public Disclosure website may have a detailed report that includes information on past criminal activity or customer complaints. The Investor.gov database should reveal registration history, qualifications and any pertinent disclosures, which include criminal charges, investigations and disciplinary actions.
Financial Industry Regulatory Authority’s database, BrokerCheck, will also detail years of experience, exams taken and state licences.
What’s the difference between a CFP and broker-dealer?
Advisers have many titles: Financial consultant, broker-dealer, wealth manager and investment adviser, among them. Know what designations they have, and what they mean. For example, advisers with the Certified Financial Planner designation must act in their clients’ best interests. They’re also known as fiduciaries. In order to become a CFP, individuals must have completed a certificate or degree program, 6,000 hours of related experience and have passed an exam. You can verify an individual’s CFP certification and background on the CFP Board’s website.
Broker-dealers, on the other hand, are advisers who primarily sell securities and often charge commissions on their recommendations. Commissions aren’t inherently bad, but clients should understand what they’re being charged for and feel comfortable with those fees before proceeding with the advice. The Trump administration recently delayed the Department of Labor’s fiduciary rule, which required all advisers to act in their clients’ best interests on retirement accounts, including being more transparent about such fees.
There’s a slew of other types of professionals who may interact with your money, according to financial planning firm LearnVest. They include Certified Public Accountants, who are not trained in areas of personal finance outside of accounting; enrolled agents or Internal Revenue Service-approved tax preparers; Chartered Life Underwriters, who excel in life insurance; and Certified Employee Benefit Specialists, who specialize in employee benefit plans.
Also see: Beware of hidden costs if you change financial advisers
What are the financial products they’re offering?
Ask questions about the funds your portfolios are invested in, know the difference between various types of stocks and bonds offered and stay current with investment management practices. About 40% of Americans don’t know how their portfolios are allocated, even though the wrong investment allocation could mean missed potential returns or even losing money.
Here are other questions to ask your financial adviser, as recommended by life and business strategist Tony Robbins:
• Are you a registered investment adviser?
• Are you or your firm affiliated with a broker-dealer?
• Does your firm offer proprietary mutual funds or separately managed accounts?
• Do you or your firm receive any third-party compensation for recommending particular investments?
• What’s your philosophy when it comes to investing?
• What financial planning services do you offer beyond investment strategy and portfolio management?
• Where will my money be held?
He explains how to interpret the answers here.
Should I be attracted to ‘guaranteed returns’?
The SEC noted a few red flags for investment fraud: If it sounds too good to be true, it usually is. “Guaranteed returns” do not exist. Watch out for the “halo effect” when scammers make themselves seem trustworthy (or angelic) by associating themselves with a well-known, trusted brand. Don’t listen to the “everyone is buying it” claim because it isn’t true. Don’t fall for pressure to send money immediately to anyone. And beware of free lunches or workshops.
Source : MTV
