Fiduciary Advice

5 Red Flags to Look for When Hiring a Financial Advisor

5 Financial Advisor Red Flags

Want to avoid hiring the wrong financial advisor? Look out for these five financial advisor red flags during your search process.

As your financial life becomes more complex, it’s natural to seek guidance from an experienced professional. Ideally, you want someone who’s highly qualified and trustworthy to manage the details of your finances, so you can focus on the rest of your life. Yet finding and hiring the right financial advisor isn’t always as easy as it seems.

Indeed, there’s no shortage of people who call themselves a financial advisor in the United States today. According to the Bureau of Labor Statistics, there are over 260,000 “personal financial advisors” in the U.S. as of May 2021. If you happen to live in a big city or busy suburb, you may have dozens of financial advisors within a mile of your home.

So how do you choose the right financial advisor? And more importantly, how can you avoid entrusting the wrong person with your money? In this article, we’re sharing five red flags to look for when hiring a financial advisor.

Before hiring a financial advisor, look for these five red flags:

Red Flag #1: They’re not a fiduciary.

You be surprised to learn that not all financial advisors act in their clients’ best interest. In fact, only financial advisors that hold themselves to a fiduciary standard of care must legally put your interests ahead of theirs.

Meanwhile, broker-dealers, banks, and insurance companies typically hold their financial advisors to a less stringent suitability standard. That means they may be considering other factors when making investment recommendations—for example, their payout.

Keep in mind that in the United States, registered investment advisors (RIAs) must act in a fiduciary capacity. In addition, financial advisors who are CFP® professionals follow a strict code of ethics that requires them to put their clients’ interests first.

Bottom Line: If a financial advisor isn’t a fiduciary, they may not be giving you reliable advice.

Red Flag #2: They can’t explain their fees.

In general, financial advisors are compensated in client fees, sales commissions, or both. Fee-only financial advisors are paid directly by clients—and only clients—for their services. These advisors typically have a straightforward fee schedule they can show you, so you know exactly what you’ll pay for their services ahead of time. In addition, fee-only advisors have no hidden fees.

Why is this important? A fee-only compensation structure helps ensure that the financial advisor’s interests are aligned with yours. For example, if the advisor charges a percentage of assets under management, their compensation only increases if your assets appreciate in value.  

On the other hand, fee-based or commission-based advisors may earn part or all of their compensation in sales commissions. In other words, these financial advisors may be more incentivized to sell products than give advice. And since they’re paid on commission, it’s far more difficult to understand the cost to you ahead of time.

Bottom Line: A financial advisor who can’t clearly explain their fees may have hidden incentives when managing their clients’ money.

Red Flag #3: They’ll take anyone as a client.

Many financial advisors limit who they’ll accept as clients by setting minimums on investable assets, net worth, or fees. While this helps ensure their firm remains profitable, it also allows them to take on fewer clients so they can provide better service.  

If a financial advisor doesn’t have minimums or other new client criteria, you may want to ask about their assets under management (AUM) and current client base. Low AUM may indicate that their business isn’t stable or sustainable. Meanwhile, too many clients may limit the amount of personal attention you’re likely to receive.

Depending on your personal or financial circumstances, you may prefer to work with a financial advisor who specializes in serving clients like you. When your financial advisor has expertise in a certain niche, they can help point out your blind spots and anticipate future challenges.   

Bottom Line: Beware of financial advisors who will work with just anyone.

Red Flag #4: They don’t answer their phone or emails.

A recent Vanguard and Spectrum Group study revealed that four of the top five reasons investors fire their financial advisor have to do with communication. Asking a financial advisor how often you can expect to hear from them up front can help you avoid potential issues down the road.

In general, a financial advisor should meet with you formally at least annually to review your investment plan and progress towards your financial goals. However, life changes and other circumstances may warrant more frequent contact.

If nothing else, you should feel confident that your financial advisor will be available and responsive when you need them. If you call or email and don’t hear back—or only hear from their assistant—this may be an indication of the level of service you’re likely to receive as a client.

Bottom Line: If communication is rocky from the get-go, don’t expect it to change once you become a client.

Red Flag #5: They don’t have a clean regulatory history.

Lastly, make sure any financial advisor you’re considering has a clean history. Licensed financial advisors and RIAs must make regulatory deficiencies available to the public.

To research this information yourself, you can leverage free tools like FINRA’s BrokerCheck and the SEC’s Investment Adviser Public Disclosure website. These websites contain information about past regulatory issues as well as the outcome (unless the outcome is pending). They will also give you more insight into an advisor’s history and how they run their business.

Whether you think a financial advisor is risky or not, be sure to spend some time on these websites before meeting with them. If nothing else, you can make sure their answers align with the information that’s available online.

Bottom Line: If a financial advisor doesn’t have a clean history or can’t explain their history to your liking, move on.

Hiring a Financial Advisor You Can Trust

Of course, this is not a comprehensive list of red flags you may encounter when interviewing financial advisors. However, if any of these red flags pops up during your search, it’s probably a sign you should move on and find someone else to entrust with your wealth.

In addition, be sure to pay attention to your overall comfort level and chemistry with the advisors you interview. Did you like them? Did they ask good questions and listen to your responses? And most importantly, do you trust them? If you’re still not sure, ask if they can share a few client references that you can contact. Ultimately, you should feel completely confident that your money and future are secure.

Sherwood Wealth Management specializes in inherited wealth. If you’ve recently inherited a windfall or your financial situation has gotten too complex to manage yourself, we invite you to schedule a call to see if we’re a good fit.

Assembling Your Wealth Management A-Team After a Windfall

Assembling Your Wealth Management A-Team After a Windfall

After inheriting a windfall, the first step towards protecting your wealth is to assemble your wealth management A-team.

If you are the beneficiary of sudden wealth, you’re probably thrilled–but also potentially nervous about how to handle your money. You don’t want to make a mistake and owe a significant tax bill, purchase bad investments that quickly lose value, or overspend on luxury items you don’t really need.

What you do need is a team of highly qualified professionals who have your best financial interests in mind and can work with you to properly oversee your newfound wealth. After inheriting a windfall, consider these four financial experts who can provide you with the knowledge and advice you need.

A Qualified Fiduciary Financial Advisor

When you are the beneficiary of sudden wealth and need assistance with managing it, a fiduciary financial advisor should be the first person you speak with. An expert fiduciary advisor will work with you to understand your priorities for your wealth and develop a comprehensive plan to meet your objectives.                                                               

Unlike product-driven financial advisors, a fiduciary advisor has a legal obligation to put your best interests ahead of their own. Fiduciary financial advisors generally charge for their services based on a fee-only structure and do not receive any commissions for financial products that they recommend. In addition, they are required to fully disclose any conflicts of interest, must be loyal to their clients, and always act in good faith.

If possible, seek out a financial advisor who holds the CERTIFIED FINANCIAL PLANNER™, CFA®, or other advanced designation. These professionals must pass rigorous exams to demonstrate their knowledge and are typically held to the highest ethical standards.

A Knowledgeable CPA With Understanding of Tax Laws

Next on your wealth management A-team should be a Certified Public Accountant (CPA). A CPA is someone who has obtained significant experience and educational training in accounting skills, including auditing and taxation. They must pass four rigorous exams and usually have relevant, hands-on industry experience.

A CPA can advise on tax issues related to inheriting a windfall. They can also recommend strategies for reducing your potential tax liability. In addition, CPAs can coordinate with your fiduciary financial advisor to ensure that any wealth planning initiatives consider the potential tax ramifications.

An Informed Estate Planning Attorney

As a beneficiary of sudden wealth, it’s imperative to appoint a good estate planning attorney as part of your wealth management A-team. An estate planning attorney is a licensed legal attorney who can advise you on how your assets will be valued, dispersed, and taxed after your death.

In addition to probate advice, they can assist you with the following:

  • Creating a will
  • Designating your beneficiaries
  • Establishing a power of attorney
  • Finding ways to reduce estate tax where possible
  • Setting up trusts to protect your assets

In addition, estate planning attorneys may act on your behalf in case of disputes. They can also ensure your will is carried out according to plan when the time comes.

A Trustworthy Private Banker

Lastly, some beneficiaries of sudden wealth choose to enlist a private banker to help protect their assets. Many large financial institutions offer private banking as an enhanced service for high-net-worth clients.

Private banking often gives you access to a dedicated personal banker. You may also receive discounts or preferential pricing on certain products and services. Private banking may be appropriate for some inheritors of sudden wealth. Still, it’s important to note that private banking usually isn’t an adequate substitute for a full-service, fiduciary wealth manager.

Consider Sherwood Wealth Management for Your Wealth Management A-Team

If you’re the beneficiary of sudden wealth, consider working with a fiduciary financial advisor like Sherwood Wealth Management. Our boutique firm helps clients navigate newfound wealth in a supportive environment where your interests always come first. In addition, we help coordinate all aspects of your financial life. We’ll work with the other members of your wealth management A-team to protect and preserve your assets for generations. Contact us today to schedule an introductory call.

Do You Need a Fiduciary Financial Advisor?

Do you need a fiduciary financial advisor?

It’s often the case that as wealth grows, the associated challenges become increasingly more complex. For beneficiaries of sudden wealth, these challenges can feel brand-new and overwhelming. You may not know who to trust or even what questions to ask. This makes seeking financial advice a daunting task. Fortunately, some advisors have a legal obligation to act in your best interest. In other words, even if you don’t know where to start, they’ll help set you on the right path. Before hiring an “expert” to manage your sudden wealth, it’s important to understand the advantages of working with a fiduciary financial advisor.

Advantage #1: Fiduciary Financial Advisors Put Your Needs First

In its 2019 Financial Trust Report, digital wealth manager Personal Capital found that 65 percent of investors who work with a financial advisor incorrectly believe that all financial advisors make recommendations in their clients’ best interest. In reality, only financial advisors held to a fiduciary standard of care must act in their clients’ best interest. For example, registered investment advisers (RIAs) and CERTIFIED FINANCIAL PLANNER™ professionals must abide by the fiduciary standard.

Indeed, the legal obligation to act in good faith is a significant benefit of working with a fiduciary financial advisor. However, there are related benefits that can help you manage and preserve your wealth over the long term.

Advantage #2: They Provide Advice Rather Than Sell Products

Financial advisors who work for broker-dealers, banks, and insurance companies operate under a less stringent suitability standard. The suitability standard generally only requires a reasonable belief that a recommendation is suitable for a client. In other words, the recommendation can be in line with a client’s objectives and risk tolerance and not be in their best interest.

This difference can be problematic, especially when potential conflicts of interest exist. In many cases, these types of financial institutions incentivize their advisors to sell their products rather than provide objective advice.

On the other hand, fiduciary financial advisors must disclose and minimize all potential conflicts of interest. Even if a recommendation indirectly benefits them, they must communicate the potential conflicts of interest to the client. In addition, they must evaluate alternatives to ensure there isn’t a better option available. This commitment to transparency moves the advisor’s focus away from selling and towards providing unbiased financial advice.

Advantage #3: Their Compensation Is Tied to Your Success

In general, financial advisor compensation includes client fees, sales commissions, or a combination of the two. Therefore, it’s important to understand the difference between a fee-only advisor and fee-based advisor. Only one operates under the fiduciary standard.

A fiduciary financial advisor is fee-only, meaning clients—and only clients—pay them directly for the services they provide. Fee-based advisors, on the other hand, receive client fees but may also get commissions from selling financial products. Since these advisors operate under the suitability standard, they may recommend certain products simply because they pay high commissions.

The benefit of working with a fiduciary advisor is that the fee-only compensation structure helps align your interests. Because it’s common for fee-only advisors to charge a percentage of assets under management, their fees move in the same direction as your investable assets. Therefore, they’re motivated to help you build wealth, not destroy it.

Advantage #4: They Help You Navigate Major Life Events

Life can be unpredictable. Whether you’re dealing with sudden wealth, the death of a spouse, divorce, or a growing family, major life changes can have a major impact on your finances.

One of the benefits of working with a fiduciary financial advisor is that you can lean on them when the unexpected happens. In addition to overseeing your finances when you’re focused on the other areas of your life, they can help you develop a financial strategy for your new circumstances. They can also help you set new goals as your life changes and evolves.

Advantage #5: Hiring a Fiduciary Financial Advisor Can Help You Sleep Better at Night

If you’ve recently come into sudden wealth, you might be experiencing a range of emotions, from anxiety to complete overwhelm. Working with a fiduciary financial advisor can take the burden off your shoulders to make sound decisions with your newfound wealth, so you can sleep better at night.  

If you’d like to speak with a fiduciary financial advisor about developing a plan for your sudden wealth, we encourage you to schedule a call with Sherwood Wealth Management. We’ll help you take the necessary first steps so you can feel more confident about your finances and future.