It’s generally agreed that one of the keys to your financial well-being, especially over the long haul, is to select the right financial advisor. It’s a topic we’ve addressed before here on the Blog, including this article from just a few months back. Having the right financial professional to guide you as you plan for the future can be one of the most important relationships of your life. 

But there are pitfalls and danger signals to be aware of as you evaluate financial advisors. To alert us to a few of these, we’re turning our attention to this recent article from CNBC in which writer and editor Jessica Dickler waves the so-called red flag – four of them, to be precise.  

These are fairly basic points, it’s true, but taken together they represent an important reminder: choose your financial advisor with care. Let’s see what caution areas Dickler is most concerned about. 

Plenty of Choices Among Financial Advisors 

There are plenty of ways to find a financial advisor these days, Dickler begins, whether you’re asking for a friend’s referral or scrolling social media and search engines. But “picking the right person for your needs is a different story.” 

“If you can’t make a connection, chances are the advice might be a little sterile because it’s not about you,” says Paul Brahim, a certified financial planner and president of the Financial Planning Association. One thing we don’t need is a cookie-cutter financial plan. But without a solid connection between you and your planner, that’s what you’re likely to get. 

Fortunately, Dickler presents us with some tried-and-true tips for vetting a financial professional, along with “key red flags” to watch for in the process. She writes, “Before initiating what could be one of your most important relationships, here are those warning signs, according to experts.” 

Red Flag: You’re Not Certain About Your Advisor’s Credentials 

First and most importantly: you need to be able to trust your financial professional implicitly to help you make sound decisions. “To that end,” Dickler writes, “some advisors are bound by the fiduciary standard, which means that they are required to act in your best interest. Otherwise, financial planners and investment advisors may recommend investments that fit your needs under a less strict suitability standard.” 

Brahim adds, “Certified financial planners, at least from a code of ethics perspective, have the highest fiduciary standing.” 

Dickler recommends verifying any potential CFP’s background using the CFP Board’s website. “Brokers and brokerage firms can be looked up on the Financial Industry Regulatory Authority site and investment advisors can be checked out on through the U.S. Securities and Exchange Commission’s Investment Advisor Public Disclosure,” she adds.  

To paraphrase President Ronald Reagan: when it comes to checking out a financial advisor’s professional qualifications, it’s essential to “trust, but verify.” 

Too Many Job Changes Can Be a Warning Sign 

Gerri Walsh, president of the Financial Industry Regulatory Authority (FINRA), encourages doing a quick check on a candidate, noting that you can learn a lot about a person even from a brief look into their background. This includes how long they’ve worked in the industry and whether they’ve bounced between firms, “which is not necessarily a red flag but could be a yellow flag for you to consider,” she adds.  

FINRA’s online Broker Check also includes complaints from customers against investment professionals, and while Walsh notes that complaints aren’t necessarily deal breakers, “a minor records violation is one thing, and unauthorized trading may be another.” 

Red Flag: Relationship Lacks Transparency, Especially Concerning Fees 

Brahim notes that a lack of transparency around fees is another red flag: “It’s important to understand the form of compensation and the total cost,” and an advisor should be able to articulate that “pretty quickly.” (We recently wrote about this issue in this Blog article.) 

Walsh explains that normal fee structures tend to be based on the assets under management, but that’s not always ideal for every situation: “[If] you have $100,000 and you are paying 2 percent, are you getting $2,000 of value? You might be better off with a fee-for-services model.” 

In the case of this example, you might pay a flat fee, an hourly rate, or even some combination. But Walsh adds that advisors could also earn a commission based on transactions they make or products they sell. “You want to make sure you understand how the investment professional gets paid and how you pay them — those are two different things,” she says. 

Red Flag: Rapport and Emotional Connection Are Missing 

There’s no rule that says you have to love your financial advisor, but experts say it’s generally considered a “green flag” if you get along. “We become part of each other’s lives,” Brahim says. “It should be a long-term collaborative relationship; it’s not just about math.” 

In a way, he says, choosing a prospective advisor might feel a little like the early stages of dating. They should be asking you questions about your life. “[A] lot of folks in our industry will start talking about themselves, that’s a red flag,” Brahim adds, because it’s ideal for them to have an understanding of similar experiences to yours. “Have they seen your scenario a time or two in the past?” 

Still, Dickler reminds us, no two relationships are the same. And because of this, Walsh suggests sharing all of your goals, challenges, and financial constraints with your advisor to give them the fullest possible picture of your situation.  

“Your goals are going to be unique to you,” Walsh says. “Your circumstances are going to be different and your capacity to absorb risk.” 

Red Flag: Financial Products Take Precedence Over Financial Planning 

Dickler concludes her article with a final red flag: pushy salesmanship.  

Brahim says that if you get the sense that a potential advisor is simply pitching you ideas for investments or products without getting deeper clarity around your unique goals and objectives, that’s a warning. This kind of pitching early in the process could indicate that you’re dealing more with a salesperson than an advisor.  

Says Brahim, a good advisor should know that your interests come first, with a thorough assessment of your financial situation. He adds, “The recommendations for products emerge from the financial plan, they don’t come before the financial plan.” 

Walsh takes it a step further: any time someone is leaning on you to make an investment or purchase, especially if they’re rushing you, “take a step back. Pressure can be a red flag of inappropriate behavior or potentially fraud.” 

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(originally reported at www.cnbc.com)