Financial advisors can be extremely helpful in helping you increase your wealth and meet your financial goals, but finding a good one might be more challenging than you think. It’s hard to know which advisors are a good match for you and have your best interest at heart.

There are many excellent, caring, understanding, knowledgeable financial advisors out there. Unfortunately, the financial planning industry is not set up in a way that favors advisors who genuinely want to help people. 

The vast majority of Certified Financial Planners work for companies that are selling investments or insurance. While the CFP Board requires CFPs to sign a code of ethics, advisors are still allowed to receive compensation from the financial products they sell. Loopholes allow advisors to say they are fiduciaries (who are required to act in your best interest) only some of the time. Therefore, you have to know what to look for in order to find an advisor who’s right for you. 

How Financial Advisors Are Paid

Financial advisors receive compensation in one of three ways:

1. Commissions: Advisors receive a percentage from the sale of investments, insurance, or other financial products. 

2. Fees: An advisor could charge you an hourly fee, a flat fee, or a management fee that is a percentage of the assets he or she manages for you. 

3. Salary: Many large firms employ advisors who are available to provide financial planning services. They do not earn a commission or charge a separate fee, but they might get bonuses or other incentives for meeting sales goals or bringing in new clients. 

* Note that there are two confusing terms that the industry uses: fee-only and fee-based. A fee-only advisor is just that: someone who receives a clearly identified fee for services. A fee-based advisor will also charge you a fee, but may also receive compensation from commissions. 

Financial advisors are required to disclose this information, and an advisor who won’t tell you how they’re paid shouldn’t be trusted.

Why is this important? 

It’s important to know how your advisor is paid so that you can determine their incentive for recommending certain financial products. Although advisors are supposed to adhere to a fiduciary duty (where they commit to making recommendations that are in your best interest), if he/she takes off the advisor hat and puts on a broker-dealer hat, they then only have to adhere to a suitability standard. This means they can sell you products that are appropriate but not necessarily in your best interest. 

Signs You Might Need a New Financial Advisor

The advisor doesn’t base recommendations on a comprehensive financial life plan.

If the advisor doesn’t start by talking about your specific situation and goals before talking about investments or insurance, chances are they’re just trying to sell you things. Investment and insurance decisions should never be made in a vacuum. Everyone’s situation is different. Things like risk tolerance and life goals are highly individual. An advisor who doesn’t bother to really understand you, your goals, and your values isn’t going to be able to give you the best advice for you. 

The advisor assumes there is only one way to do things. 

Personal finance is just that: personal. Aside from a few generally accepted principles (like spend less than you earn, or save for retirement), there are many “right” ways to manage your finances. Anyone who tries to tell you that you must get rid of your credit cards, or you must buy a house instead of renting is unlikely to be able to help you design a financial plan that is right for you. 

We all have different goals and values. The budgeting method that works for one person isn’t going to work for another. One family might feel it is important to maintain a large family home while another wants more flexibility to travel or move around. 

You need a financial coach or advisor who is able to walk you through the process of creating the right financial plan for you.

The advisor doesn’t explain things in a way you understand.

Just yesterday I was speaking to an accountant who is excellent at what he does, but he was struggling to understand exactly what I was asking. I managed to get the information I needed, but that’s sometimes not the case. 

A few days ago I was listening to a financial podcast and the host and guest kept talking about delta, which has to do with the change in value of an investment. Translating financial speak into words clients can understand is an important skill. If you are comfortable with all the technical language, that’s fine, but how many of us go around talking about delta? 

An advisor who doesn’t explain your investments may or may not be giving you solid advice, but if you don’t understand why you need an investment or insurance product, you should either push for more information until you’re satisfied or kick the advisor to the curb. 

You deserve information. Trust your gut. 

The advisor recommends whole life insurance.

Very few people need anything other than term. Whole life insurance is great when used as a tax reduction strategy or as part of a business succession plan. Otherwise, it is usually not necessary. Term life insurance is just fine, and way more affordable. 

The advisor doesn’t offer index funds. 

Index funds are arguably the best investment strategy.* They offer low fees that won’t eat away at your returns as much, they reduce risk through increased diversification, and they have a history of outperforming other types of funds. The best investors in the world usually can’t beat index funds over long periods of time. Even Warren Buffet recommends that most people invest in index funds rather than try to pick individual stocks. 

Index funds are a proven strategy (though of course nothing is guaranteed in investing). If your investment advisor does not offer index funds, it is typically because the advisor doesn’t make much money off of them because they don’t require active management. 

*I am not an investment advisor and nothing I’ve said should be considered investment advice. Please consult a registered investment advisor before making investment decisions. 

The advisor won’t commit to a fiduciary standard at all times.

The problem is that people selling investments and insurance are allowed to offer products according to a suitability standard without having to follow a fiduciary standard. This means that advisors can sell things that are “suitable” for you even if they aren’t in your best interest. Life insurance falls into this category because life insurance might be a reasonable thing to have even if it is not the best thing for you to do. 

In my practice as a financial coach, I am always a fiduciary because the whole point of my work is to help clients find the best financial plan for them. I don’t sell investments, insurance, or other financial products, so it wouldn’t even be possible for me to sell you things that aren’t in your best interest. 

Any time you hire a financial advisor, you need to know if that person is a fiduciary at all times and how they are compensated. 

Whether you hire a fee-only advisor, one who receives commissions, or a fee-based advisor who is paid a set fee and can receive commissions, you need to know what incentives the person has to sell you financial products so that you can make the best decision for you. 

A Note on Advisors Who Receive a Commission

Some people argue that you should only hire fee-only advisors in order to get the best advice for you. That may be true for most people, particularly for those who aren’t knowledgeable about financial products. 

However, that doesn’t mean it is never a good idea to use a commission-based advisor. You just have to be more careful. 

It is possible to find good advisors who work for companies selling you investment products and who aren’t strictly fee-only. If you have a person that you like, you don’t need to can them because they might get a commission. You just might need to educate yourself a little more so you can evaluate when something really is appropriate. 

It is not uncommon to have retirement savings invested in low-cost index funds that you manage on your own and to also have a brokerage account managed by an investment advisor. 

Ultimately, you need to find someone who is right for you.

Educate yourself on the topics enough to know when someone might be selling you products that are not right for you. A fee-only advisor who listens to you, explains things, and connects with you can be an important resource in building wealth and creating a life you love. 

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