Blog | Personal Finance

Financial Advisors: Be Careful Who You Trust

meet your own rich dad - start your quiz now

Interview questions to ask financial advisors before you commit

I recently wrote a post about the worst advice entrepreneurs receive. In it, I spoke about being careful when looking at the source of the advice, and how to separate the good from the bad.

This is not only true for business owners but is especially true of your personal finances. And since many people don’t know where to get trusted advice from, they people turn to financial advisors to help them manage their money.

Be careful who you trust

There’s a lot of information out there about how to invest successfully. That advice comes in many shapes and forms, from recommendations about assets to invest in, to tips on how to manage a diverse portfolio.

Surprisingly, some of the worst advice often comes from the people who make a career out of handing it out: financial advisors.

I’ve met some fantastic financial advisors over the years who have become good friends and trusted mentors for my investing decisions. But, I always strongly caution people to do their homework before turning to financial advisors for investing advice. You must be careful about who you trust your money with, and make sure you know exactly what you’re getting into.

Questions to ask your financial advisor

Below are some questions you should ask before working with a financial advisor. If they can’t answer these questions, it’s a good sign you should step away.

  1. What are your qualifications?

    According to Investopedia: “Financial advisors are required to pass and possess the General Securities Representative license, also known as the Series 7. This test covers all the basic investment knowledge and regulations that financial advisors must know. Financial advisors also have the Series 63 license, which is the Uniform Securities Agent State license. This allows advisors to conduct business across multiple states. Advisors who wish to charge advisory fees must also take the Series 65 exam or the Uniform Investment Advisor Law exam. These three licenses are held by most financial advisors in the industry.”

    In addition, if financial advisors are looking to work for a brokerage firm, they are also required to hold a bachelor’s degree. Though it’s not necessary, many financial advisors continue their education by earning additional professional licenses, certifications, and designations.

    What most people don’t realize, however, is that part of their job is sales. Whether they work for a brokerage firm or for themselves, their success isn’t based on how much money they make you, their client, but how many people they get to sign up to use their services.

  2. What are your conflicts of interest?

    There was a great article in the Wall Street Journal about why financial advisors are never truly “conflict-free.”

    The article says: “All financial advisers — like all people who perform a service for anyone else, including journalists — have conflicts of interest. That’s true regardless of whether they work for someone else or for themselves, whether they earn fees or commissions, or whether they call themselves ‘fiduciaries’ who put clients’ interests ahead of their own.”

    No matter what an advisor says, they have biases. That’s what it means to be human. We all carry our own opinions and conflicts, and you better know what your advisor’s are before you hand over your money.

    As the article points out, marketing that you are conflict-free can lull people into a false sense of security. It’s almost like saying they are “risk free” and we all know that investing is never, ever risk free (unless you’re doing it illegally).

    Make sure you know how your advisor is conflicted. If they’re upfront about their biases, that’s great. But odds are, they’ll work hard to sell you on their conflict-free programs. It’s up to you to dig deeper and do the research to understand them.

    One important note: just because a financial advisor has a conflict doesn’t mean you should write them off. Like I just said, everyone has biases. The key is to do enough research that you understand the way their firm works, and be able to make informed choices when you invest. It’s a decision only you can make, but you have to have all the information before you do.

  3. Where do you get your information?

    When an advisor gives you tips or advice, do you know where their data is coming from? More importantly, if you asked, would you be able to understand their answer?

    It’s vital that you increase your own financial literacy before approaching a financial advisor. If you don’t understand how they make their decisions or come to investing conclusions, you shouldn’t be investing.

    Some advisors like to throw people off by using big financial terms, hoping they’ll get confused enough to just hand over their money, no questions asked. But if you have a base financial understanding, you can press deeper and uncover their methods. From there, you can decipher if they’re getting benefits for endorsing a specific investment, or are employed by a specific company pushing a specific investment.

  4. How does this fit into my overall investing strategy?

    You are unique. Your goals, financial circumstances, retirement plan, and lifestyle are different from everyone else’s. One mistake most people make when working with a financial advisor is to allow themselves to be put into a “one-size-fits-all” investing plan.

    Just because one investing plan works for someone, doesn’t mean it will work for you. And you shouldn’t allow anyone to talk you into investing a certain way because it worked for someone else.

    Many financial advisors specialize in certain types of clients. They have a good deal of experience, and if you find one you trust who has had success, you should consider their advice. But make sure that every question you ask leads back to the main question: “How does this help me achieve my financial goals?”

    The best way to do this is to make sure you have your financial plan laid out before walking into a meeting with an advisor. If you know where you want to end up, you’ll be able to better steer the conversation, and ask the right questions, to set you on that path.

    You’ll know you’ve found a strong advisor if they support you in your goals, and help you consider your options without pressuring you or controlling you.

    If you aren’t sure what you should do about your personal or business finances, take our short assessment to help us pair you with the ideal solution for personal financial needs.

  5. What is your philosophy on diversification?

    As I discussed in my post on diversification : “When most financial planners and advisers tell you to have a diversified portfolio, they are usually referring exclusively to your stock portfolio. Diversification to them means investing across the various stock sectors, such as large cap, small cap, blended, blue chip, high tech, or alternative energy.”

    That might be good advice for some people, but that’s not what Rich Dad means by diversifying your portfolio. To truly diversify your investments, you need to invest in all four asset classes: real estate, paper assets, business, and commodities.

    When you discuss your investing strategy with financial advisors, be sure to pay attention to the vocabulary they use. Remember, you are looking for a partner, someone you can trust with your money. It’s important that they can speak to you in terms you understand.

    Which brings us to another important note: you are responsible for your financial education. If you don’t feel comfortable speaking about your finances, increase your vocabulary. Understand how to read the numbers. To help, complete your own personal financial statement and bring a copy with you for discussion. Spend time reading books, listening to podcasts, attending seminars and, of course, playing games.

    But most important of all, question everything. Only you truly know your dreams and desires.

  6. How do taxes work when I invest with you?

    Taxes are an often overlooked piece of the investing puzzle. No matter what asset class you choose to invest in, you need to know the advantages and disadvantages of how taxes affect your investing decisions.

    Some things to consider:

    • Am I only taxes on gains or can I also get taxed on my losses?

    • Am I taxed on the money I put into the account or will I get taxed when I pull money out? Is there a difference?

  7. How often will we meet?

    A financial advisor should be another player on your team. They are someone to educate and support you, not someone who calls the shots. Listen to your gut instinct, and if you have any doubts or concerns about an advisor, it might be time to walk away.

    Like most everything in life, don’t make any decisions when your emotions are running high. Remember, part of a financial advisor’s job is to sell you their services. Take the night to sleep on it before making any decisions.

Original publish date: April 13, 2017

Recent Posts

Three Investment Values
Personal Finance

The Rich Dad Guide to Investing Values: Defining Your Path to Financial Success

It’s important to know which core values are most important to you, especially when it comes to the subject of money and financial planning.

Read the full post
Risky vs. Safe Investments
Paper Assets

Smart Investing: Understanding the Difference Between Risky and Safe Options

What you may think is a “safe” investment, I may see as risky. For example, many financial planners advise their clients to get into so-called “safe” investments — such as savings plans, mutual funds and 401(k)s.

Read the full post
Mastering Money
Paper Assets, Personal Finance

Mastering Money: The Key to Achieving Financial Freedom

Begin the path to making money work for you today, not the other way around.

Read the full post