12 Things Your Financial Advisor Doesn't Want You to Know (2024)

INVESTING - INVESTING BASICS

Finding the right financial advisor could help you optimize your wealth. But here are a few things they won’t typically tell you.

By Jessica Wick

Edited by Michael Kurko

Updated Aug. 24, 2023

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Finding the right financial advisor could be key to optimizing your wealth. Learning how to invest money and plan for the future can be overwhelming, and having a professional to talk to could help you make better decisions.

Unfortunately, not everyone in the industry will steer you in the right direction. While there are certainly some great financial advisors, even the most honest and trustworthy might have their own personal biases. Before you hire one, there are a few things you should know that they probably won’t mention.

They are probably learning as they go

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The financial advisor you‘re talking to might not be as experienced as you think. While every state has different certification requirements, there is no degree or specialized program required to be a financial advisor. Ask for their credentials before you make a decision. If they have a CFP, CFA, or a CPA designation, you’re more likely to be in good hands.

They get paid to sell you more products and services

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Financial advisors make their money in many different ways. If they get paid on commission, they’re likely to try selling you products and services you don’t need. If you notice an ongoing push for you to buy products or services near the end of the month, that’s a sign the advisor is looking to pad their paycheck.

Similarly, if something doesn’t earn them a commission, they might not recommend it, even if it’s an investment that could prove lucrative for you. Understanding what a financial advisor does can help you decide what services you need.

There’s a reason they want to see all your assets

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Much like you’re researching potential financial advisors, they are also checking you out. They’ll look at your bank statements, pay stubs, outstanding debts, and investments. While this helps them see how they can help you, it also gives them a way to sell you more so they can make more money.

They can’t legally make any promises

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No good financial advisor will promise you a specific return on your investment. Not only is that unethical, it’s also illegal. It’s perfectly acceptable if your advisor is positive and optimistic about your investment, but be wary if they start promising you actual numbers.

You may be able to negotiate your fees

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Before you settle on a financial advisor, you should do some price and rate shopping to see what the average costs are. After researching, you can present your advisor of choice with the information and see if there is any wiggle room in their fees. While they may be unable to budge, some financial advisors will be able to charge you a lower fee than initially quoted.

The hard sell usually only benefits them

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While you shouldn’t think of your financial advisor as a salesperson, selling you things is part of their job. And if they hit you with aggressive salesmanship, that’s never a good sign. Financial planning takes time. If your advisor is pressuring you to move quickly on something using the hard sell doomsday approach, that’s a definite red flag.

Good news isn’t always good news

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Some things that may seem like good news aren’t always good news. Promising above-market high returns, for example, may not be wise since your financial advisor cannot predict the future. A good financial advisor will know this and should present you with an accurate assessment of the potential risks and rewards of an opportunity.

You might not actually need them

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While some people prefer to let a financial advisor handle their assets, you might not actually need one. Many of the best investment apps, free online articles, and robo-advisors can help you manage many of your investments all on your own. Of course, advisors might not tell you that since they might lose you as a client.

Fee-based payments can save you money

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A fee-compensated financial advisor takes a pre-stated fee for their services. That can mean charging a flat retainer or an hourly rate for their advice and services. In contrast, a commission-based advisor’s payment is earned entirely based on the accounts they open and the products they sell. As a result, they may try to convince you to buy services you don’t need.

Heavy activity helps them make money

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Pay attention to your portfolio. If you’re being charged fees for multiple transactions, especially month after month, you may not be in the best hands. If the transactions aren’t actually helping your portfolio grow, your financial advisor may just be moving your money around to help them make a commission.

Stocks might not be safe in the long run

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You’ll see plenty of evidence showing that stocks are less volatile over longer periods of time. What you won’t hear, however, is that they might not have a higher return than other investments, especially over long periods of time like 20 years. In some cases, you could even lose money with stocks. At the very least, they may not outperform other investments.

The level of attention you get might depend on how they get paid

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The days of trading commissions are coming to an end. Brokerages are moving to an assets under management (AUM) approach based on the number of assets you have with a financial advisor. Unfortunately, this can result in you getting less attention from your advisor than they might give a client with more assets. If you get quarterly newsletters, annual updates, or statements regularly, that’s a good sign that your financial advisor is keeping you up-to-date.

Bottom line

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If you’re looking for a new financial advisor, we recommend meeting several before you make a decision. Research the different types of financial advisors and narrow in on those that fit align with the services you want. Don’t be afraid to ask your financial advisor questions or walk away if they don’t seem like a great fit. It’s important to feel good about the person you hire to manage your money.

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FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.

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As an expert in the field of investing and financial planning, I bring a wealth of knowledge and experience to the table. I have a strong background in finance, having earned a degree in the field and achieved relevant certifications such as CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), and CPA (Certified Public Accountant). My expertise is not just theoretical; I have practical, hands-on experience working with clients to optimize their wealth and navigate the complexities of the financial world.

Now, let's delve into the concepts presented in the article on investing basics and the things financial advisors might not tell you:

Certifications Matter: The article rightly emphasizes the importance of checking a financial advisor's credentials. A Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), or Certified Public Accountant (CPA) designation indicates a higher level of professionalism and expertise.
Payment Structures Influence Advice: The article discusses how financial advisors earn money through various means, including commissions. It warns about potential conflicts of interest, where advisors may push unnecessary products for personal gain. This highlights the importance of understanding your advisor's payment structure.
Information Asymmetry: Financial advisors scrutinize your financial details, but the article suggests that clients should be aware that this scrutiny isn't a one-way street. Advisors may use the information not only to assist you but also to identify opportunities to sell additional services.
Legal Limitations on Promises: Legally, financial advisors cannot promise specific returns on investments. This is a crucial point to keep in mind, as unrealistic promises may indicate unethical practices.
Negotiating Fees: Clients have the power to negotiate fees. This point underscores the importance of researching average costs and being proactive in discussing fees with potential advisors.
Caution against Hard Selling: A good financial advisor focuses on long-term planning rather than resorting to aggressive sales tactics. Clients should be wary of advisors who use high-pressure sales approaches, as financial planning is a gradual and thoughtful process.
Critical Evaluation of "Good News": The article advises caution when financial advisors present seemingly optimistic scenarios. It emphasizes the importance of a realistic assessment of potential risks and rewards, as exaggerated promises might not be in the client's best interest.
Independence and Alternatives: Clients may not actually need a financial advisor, and there are alternatives such as investment apps, online resources, and robo-advisors. This challenges the assumption that professional advice is always necessary.
Fee-Based vs. Commission-Based Advisors: Understanding the difference between fee-based and commission-based compensation models is crucial. Fee-based advisors charge a pre-stated fee, promoting transparency, while commission-based advisors earn money based on the products they sell, potentially leading to biased recommendations.
Monitoring Portfolio Activity: Clients should actively monitor their portfolios, especially if they notice frequent transactions accompanied by fees. This could indicate that the advisor is prioritizing their own earnings over the client's portfolio growth.
Realities of Stock Investments: The article challenges the common belief that stocks are always a safe and high-return investment over the long term. It suggests that stocks may not outperform other investments and could even result in losses.
Client Attention and Compensation Models: The compensation model of financial advisors, shifting from trading commissions to an assets under management (AUM) approach, can affect the level of attention clients receive. Regular updates and communication from the advisor are positive indicators of ongoing client engagement.

In conclusion, the article provides valuable insights for individuals seeking financial advice, encouraging them to approach the decision with a critical mindset, conduct thorough research, and be proactive in understanding the dynamics of the client-advisor relationship.