Clicky

Wealth Management

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.

Rising Interest Rates and Your Portfolio

Rising Interest Rates and Your Portfolio

If you’re unsure how rising interest rates may impact your investments and overall wealth plan, here’s what to look out for and how you can prepare accordingly.

For over two years, the Covid-19 pandemic has presented a variety of new challenges to our health, lifestyle, and the economy. As the pandemic wanes, we continue to feel the impact of ongoing labor shortages and supply chain disruptions.

One of the most pronounced effects of the pandemic in recent months is record-high inflation levels. As a result, the Federal Reserve announced their first interest rate hike since 2018 in March, and economists expect several more increases this year.

Indeed, many of us have grown accustomed to near-zero interest rates. If you’re unsure how rising interest rates may impact your investments and overall wealth plan, here’s what to look out for and how you can prepare accordingly.

#1: Rising Interest Rates and Your Real Estate Portfolio

The federal funds rate influences the prime interest rate, which lenders use to determine interest rates for credit cards and other loans, including mortgages.

Up until recently, mortgage rates have been relatively low for borrowers with strong credit. However, earlier this month, the average rate on the popular 30-year fixed mortgage crossed 5% for the first time since 2011 (except for two days in 2018).

For some people, rising mortgage rates may add to the pain of an already hot housing market. If you have the resources, you may want to consider paying off mortgage debt ahead of schedule to eliminate the expense entirely. Alternatively, refinancing may help you lock in a lower fixed rate before interest rates potentially soar higher.

#2: Rising Interest Rates and Your Bond Portfolio

In general, bond prices fall as interest rates rise (also known as interest rate risk). As governments and private companies issue new bonds at higher rates, old bonds become less attractive and therefore lose value.

Not all bonds are equally sensitive to interest rates. Interest rate sensitivity is measured by duration; the longer a bond’s duration, the more sensitive its value is to changes in interest rates. One way to reduce interest rate risk in your bond portfolio is to shift towards shorter duration bonds.

However, if you have a longer time frame to invest, you may not want to make any changes to your portfolio. As your bond holdings mature, you can reinvest them at higher rates in the future.

It’s also worth noting that higher yielding and lower quality bonds tend to be less sensitive to interest rate changes. Of course, these types of bonds can introduce other risks to your portfolio. So, be sure to do your homework first.

#3: Rising Interest Rates and Your Stock Portfolio

It’s cheaper for businesses to borrow expansion loans when rates are low, which is generally seen as favorable for the economy. On the other hand, the prospect of rising interest rates typically signals slower economic growth. This, in turn, tends to spook equity investors (at least temporarily).  

At the same time, bonds and cash often become relatively more attractive as interest rates rise. This can cause stocks to lose value as demand shifts from equities to income-generating securities. And as personal debts become more expensive to service, consumers tend to spend less, further driving down stock prices.

You may not want to abandon your equity investments altogether. However, a diversified portfolio can help mitigate potential volatility as interest rates rise.

#4: Your Savings

With interest rates close to zero for the last several years, savers have earned virtually nothing on cash. Currently, the average savings account interest rate is 0.06%, according to Bankrate’s weekly survey of institutions.

One benefit of rising interest rates is that you may earn a higher rate of return on your cash. Just don’t expect a dramatic change immediately. Deposit rates are typically much slower to respond to changes in the federal funds rate.

Bottom Line: Don’t Panic

With rates at historic lows for so long and inflation at record highs, it’s no surprise that a new rate hike cycle is underway. If you have a disciplined wealth management plan, there’s no reason to panic. Interest rates tend to be cyclical and will eventually return to more normal levels.

If you don’t have a plan for your wealth, you may want to consider working with a trusted advisor like Sherwood Wealth Management. A long-term plan can help you navigate the inevitable ups and downs of the market. And it can help you successfully weather periods of uncertainty. To get started, please schedule a complimentary consultation.

You’ve Just Inherited a Windfall—Now What?

Inheriting a Windfall

Inheriting a windfall may seem like the answer to all of your financial problems. Yet sudden wealth is often a double-edged sword.

While money certainly allows you more freedom, it can also create new problems if you aren’t prepared to manage it. Fortunately, there are steps you can take to protect, preserve, and grow your newfound wealth, whether you’ve been anticipating it, or it comes as a complete surprise.

Consider taking these steps After inheriting a windfall:

1. Set Your Funds Aside for a Few Months

Though you may be anxious to put your new wealth to work, the best first step after inheriting a windfall is often to do nothing at all. This is especially important if the inheritance substantially changes your net worth. It may take a while to get comfortable with your new reality.

A conservative rule of thumb is to leave the inheritance untouched for at least 90 days. During that time, you can begin to assemble your wealth management team.

2. Determine the Tax Consequences

As Benjamin Franklin famously said, “Nothing is certain except death and taxes.” If you come into a large sum of money, it’s important to understand the potential tax consequences before making any big decisions.

A CPA or financial planner can help you determine your potential tax liability. In addition, they can recommend strategies to minimize the taxes you owe.

3. Eliminate High-Interest Debt

Once you come to terms with your newfound wealth and understand the tax consequences, you can focus on setting financial goals and developing your wealth plan. Typically, a good first step is to eliminate high-interest debt.

If you have so-called “bad debt” like credit card or other high-interest loans, paying it off with a portion of your inheritance can reduce financial stress and save you money over time. Additionally, if you have student loans you’ve been carrying for a while, now may be a good time to pay those off once and for all.

Having too much debt can create a variety of financial challenges. However, that doesn’t mean you need to eliminate all debt. For example, if you’ve locked in a low interest rate on your mortgage, you may want to focus on other financial priorities before paying off your home.

4. Check Your Emergency Savings

No matter your net worth, it’s important to have cash set aside for unexpected expenses and potential setbacks. Tying your wealth up in investments and illiquid assets can create difficulties if you need cash quickly.

Though most financial experts recommend having three to six months of living expenses in emergency savings, this is a broad rule of thumb. Consider consulting with a trusted financial advisor to determine how much cash makes sense for you.

5. Maximize Tax-Advantaged Accounts

Whether you’re working or not, tax-deferred retirement and health savings accounts can be useful tools for preserving more of your wealth long-term. Be sure to review which accounts are available to you and maximize their benefits.

If you’re still working, you may now have an opportunity to supplement your income with your inheritance so you can max out your retirement plan contributions. In addition, individual retirement accounts offer meaningful tax benefits, especially if you plan to invest long-term.

Lastly, health savings accounts (HSAs) offer unique tax savings as you can contribute, invest, and withdraw your funds tax-free, so long as you use them on qualifying healthcare expenses. However, not everyone is eligible to open an HSA. If you have a qualifying high-deductible health plan (HDHP), you may want to explore this option.

6. Invest for Your Financial Goals

When you come into sudden wealth, it’s not unusual for long-lost friends, family members, and other acquaintances to come out of the woodwork looking for opportunities to prey on your good fortune. While you may be tempted to invest in their startup or investment scheme, remember: if it seems too good to be true, it probably is.

Instead, start by creating a list of financial goals. For example, do you have young children you’d like to send to college? Do you want to stop working altogether or buy your dream vacation home?

Then, work with a trusted financial advisor to develop an investment plan that helps you achieve these goals without taking on unnecessary risk. This approach may not seem as exciting as investing in a friend’s startup venture. However, you’re more likely to preserve and grow your wealth following a disciplined investment plan.

7. Treat Yourself

Having a plan for your wealth is important. However, money should also be enjoyed. If there’s something you’ve always wanted to do but money has been an obstacle, now is the time to make those dreams come true.  

Perhaps you can finally take that exotic vacation you’ve been thinking about. Or your dream car is suddenly within reach. There’s nothing wrong with treating yourself. Just make sure you consider your long-term game plan, too.

Bottom Line: If you’re inheriting a Windfall, Manage Your Wealth So You Can Enjoy It Long-Term

Inheriting a windfall can be exciting and daunting at the same time. These steps can help you set yourself up for success, so your newfound wealth lasts through your lifetime and beyond.

If you anticipate an inheritance or other windfall or have recently come into sudden wealth, speaking with a fiduciary financial advisor like Sherwood Wealth Management can help. We specialize in the unique financial planning needs of inheritors and sudden wealth beneficiaries and always put our clients’ needs first. Please schedule an introductory consultation to see if we may be a good fit to help you manage your wealth.

How to Recognize and Avoid Sudden Wealth Syndrome

How to Recognize and Avoid Sudden Wealth Syndrome

It’s hard to imagine sudden wealth being a bad thing. Few of us would turn down a winning lottery ticket, an unexpected inheritance from a long-lost relative, or a cash bonus from an employer. Most of us have already fantasized about how we’d spend it. Nevertheless, sudden wealth syndrome is a very real condition that often presents itself in people who receive an unplanned financial windfall. Since it can lead to potentially negative outcomes, it’s important to be able to recognize the signs.

What Is Sudden Wealth Syndrome?

Sudden wealth syndrome (SWS) refers to the psychological stress or identity crisis individuals who abruptly acquire wealth often experience. For many people, sudden wealth may come from a large inheritance, a divorce settlement, or the sale of a business. However, the recent explosion of bitcoin millionaires suggests that SWS is becoming a relevant concern for casual investors, as well.

Sudden wealth syndrome can manifest itself in a variety of unfavorable ways. For example, some people isolate themselves from family and friends. Others become paralyzed by the fear of making a wrong decision. Still others behave impulsively, making decisions they later regret. Regardless of the symptoms, sudden wealth syndrome can prevent you from living a full and prosperous life.

How to Avoid Sudden Wealth Syndrome

Fortunately, sudden wealth syndrome is preventable. If you begin to spot its signs, there are concrete actions you can take to adjust to your new financial status and make sound decisions that support your values and goals.

#1: Take a Beat

When you first come into new money, you may be tempted to buy all the things you couldn’t previously afford or pay off lingering debt. However, this is also the time when long-lost family members and friends tend to come out of the woodwork to ask for financial support.

It’s natural for your emotions to run wild initially. The key is to not let them affect your ability to make good decisions. Instead, hit the pause button. Spend a few months adjusting to the idea of having wealth and what that means for your future. Moreover, make sure you’re mentally prepared to meet the challenges and opportunities that await you.

In the meantime, keep your cash in a savings account or money market fund so you don’t feel pressured to make any decisions before you’re ready.

#2 Assemble Your Financial Team

The idea of hiring a team of advisors to help you manage your money may feel overwhelming in itself. However, a well-rounded team of specialists can help you protect and preserve your wealth for the long term.

For example, your financial team may include:

  • An attorney who can establish appropriate legal entities to protect your assets.
  • A certified public accountant (CPA) who can advise on near- and long-term tax considerations.
  • A fiduciary financial advisor who can help you identify your financial goals and develop a long-term financial plan to meet them.

You may already have relationships in place that you can leverage to help you accomplish your financial goals. If not, give yourself enough time to interview potential candidates until you’re confident you’ve found a team that will act in your best interest.

#3: Set Financial Goals and Develop a Long-Term Plan

If you’re suffering from sudden wealth syndrome, you may feel like your finances are controlling you. However, as you set goals and develop your plan, you’ll realize that you’re actually in control of your finances.

Financial goals can include anything from paying for your children’s college education to buying a vacation home. As a recipient of sudden wealth, you may find that once lofty goals are now well within reach. In other words, you may need to reevaluate your objectives and set a few new goals. For example, you may want to explore a charitable giving strategy or revisit your estate plan.

Once you set your goals, you’ll want to develop a financial plan and investment strategy that support them. These will serve as your roadmap for navigating future financial decisions. Moreover, adhering to a plan will help you avoid letting your emotions take over.

#4: Be Present and Enjoy Yourself

Finally, don’t forget to enjoy your new financial status. Sudden wealth can create stress, but it can also alleviate it. While money alone doesn’t make us happy, it does give us the freedom to pursue what’s most important to us. So, if you previously found yourself consumed with anxiety about the future, give yourself permission to finally put those fears aside and enjoy what you have.

Of course, you don’t have to wait until the signs of sudden wealth syndrome appear to take action. If you’ve recently come into sudden wealth and want to speak with a financial advisor about next steps, we encourage you to contact us. We can help you develop a plan that supports your goals and ambitions while preserving your newfound wealth.