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Choosing a financial advisor is a major life decision that can determine your financial trajectory for years to come.
The value of working with a financial advisor varies by person and advisors are legally prohibited from promising returns, but research suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.
A recent Vanguard study found that, on average, a $500K investment would grow to over $3.4 million under the care of an advisor over 25 years, whereas the expected value from self-management would be $1.69 million, or 50% less. In other words, an advisor-managed portfolio would average 8% annualized growth over a 25-year period, compared to 5% from a self-managed portfolio.
Being aware of these seven common blunders when choosing an advisor can help you find peace of mind and avoid years of stress.
1. Hiring an Advisor Who Is Not a Fiduciary
By definition, a fiduciary is an individual who is ethically bound to act in another person’s best interest. This obligation eliminates conflict of interest concerns and makes an advisor’s advice more trustworthy.
2. Hiring the First Advisor You Meet
While it’s tempting to hire the advisor closest to home or the first advisor in the yellow pages, this decision requires more time. Take the time to interview at least a few advisors before picking the best match for you.
3. Choosing an Advisor with the Wrong Specialty
Some financial advisors specialize in retirement planning, while others are best for business owners or those with a high net worth. Some might be best for young professionals starting a family. Be sure to understand an advisor’s strengths and weaknesses before signing the dotted line.
4. Picking an Advisor with an Incompatible Strategy
Each advisor has a unique strategy. Some advisors may suggest aggressive investments, while others are more conservative. If you prefer to go all-in on stocks, an advisor that prefers bonds and index funds is not a great match for your style.
5. Not Asking About Credentials
To give investment advice, financial advisors are required to pass a test. Ask your advisor about their licenses, tests, and credentials. Financial advisor tests include the Series 7, Series 66 and Series 65. Some advisors go a step further and become a Certified Financial Planner, or CFP.
6. Not Understanding How They Are Paid
Some advisors are “fee-only” and charge you a flat rate no matter what. Others charge a percentage of your assets under management. Some advisors are paid commissions by mutual funds, a serious conflict of interest. If the advisor earns more by ignoring your best interests, do not hire them.
7. Trying to Hire an Advisor on Your Own
Chances are that there are several highly qualified financial advisors in your town. However, it can seem daunting to choose one.
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