6 Mistakes to Avoid With a Financial Adviser


Financial advisers can be an important ally for even the most savvy investors, because a second opinion can sometimes be the difference between comfortable retirement and eating lots of ramen in the later years. Yet, many people shy away from a relationship with a professional because of all the horror stories others have. Below are six common mistakes that people make with financial advisers. Don't make the same mistakes, and hiring a financial adviser could become one of the best decisions you've ever made. (See also: Do a Background Check Before Hiring Your Financial Adviser)

1. Sending Your Money Directly to a Financial Adviser

This is way too common. There should be a third party custodian that handles the money, which is typically a brokerage firm. (Note: You might also want to call the company and verify that they are really going to handle your money properly before you send them the first check.) Do not ever write a check with your financial adviser's name on it, unless you owe him money!

2. Not Asking Enough Questions

Most people don't ask nearly enough questions when they meet a potential financial adviser for the first time. How will the relationship work? How often should you meet? What is the first step? Do you have a list of references? Everything is on the table, and financial advisers should be happy to provide all the information you need.

3. Not Negotiating a Discount

Some charge a one-time fee, and others charge you a percentage of your assets to help you manage them. Either way, always try to get a discount. Usually, there is less room for negotiation for the advisers who charge a one-time fee and more for those who charge a percentage. On the latter, remember to ask how big your assets should be before you get additional discounts because typically, higher net worth clients can demand lower percentages. Before you make a commitment, you have the upper hand in the negotiation, so take advantage of it.

4. Not Knowing How Your Adviser Is Being Compensated

Conflicts of interest can mean that your adviser will steer you to certain investments that are good for someone other than yourself. Work with advisers who have the fewest conflicts of interest to make sure you are being treated fairly.

5. Not Starting Small

Many people will procrastinate with their decision, but once they decide to send their money to a new adviser, they pour everything over. As with any type of service, you really can't be 100% sure how everything will work until you start working with your adviser. Therefore, it's best to start slow, move only a portion of your money over at the beginning, and continue your evaluation until you are more comfortable with your relationship.

6. Not Using Common Sense to Critique Your Own Plan

Regular assessment is how you can make sure your plan will work. Take a step back periodically and reassess your entire plan to see how the investments and strategy are working out. Inviting your friends to discuss your plan can help too, but just make sure you leave the actual numbers out of the conversation if you are uncomfortable sharing how much you already saved for retirement.

Financial advisers can be your best buddies, or they can turn into nightmares with dire consequences. Don't make the mistakes listed, and don't blindly follow every suggestion your financial adviser makes. The good news is that as you practice being more careful and critical of your relationship, it will become second nature.

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Guest's picture

They can be helpful to many people who really arent familiar with personal finance at all, however a lot of good information can be found online via reputable personal finance sites. Also, if you are a beginner investor, then a 401k, roth IRA, and an online brokerage setup yourself can minimize your costs. No need to get complicated and run to an FA right away. Saving the extra money you would pay an advisor can go back into your investments!

Guest's picture

#1 would have to be not taking the time to create an investment plan at all. I am shocked and saddened at the number of people I come into contact with who have no idea what they are doing investing-wise. Financial education should really start Financial en high-school!

Guest's picture

IMHO, #4 is the most important one on the list.

Many "financial advisers" are simply salespeople in disguise. Their main objective is to direct you to their brokerage and their firm's financial products where they make a commission, not provide you with objective, professional advice.

Do yourself a favor and follow these three tips:

1) Don't pay for a "financial plan" unless it deals with specific, complex issues. Many so-called "financial plans" are not much more than an asset allocation plus a recommendation of specific products being offered by that company. Most major brokerages will provide you with free materials that will guide you through the asset allocation process (Fidelity, Prudential). Get on Morningstar and learn how to evaluate a mutual fund.

2) When you need advice, go to a professional advisor, not a salesperson.
Good sign: They help you identify your financial needs, address specific financial topics that affect you, and deal with the behavioral issues (budgeting, not saving enough, your relationship with money) that are holding you back.
Bad sign: They want to tell you about a product they think is right for you (sales!).
Try a fee-only financial planner - there are lots of them!

3) When you know what you need, find the least expensive way to execute your plan.
Vanguard comes to mind here.

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