5 Red Flags When Choosing a Financial Planner

Libby Kane

two women discussing business on couchesYou know what they say: You can’t choose your family, but you can choose your financial planner.

Or something like that.

One of the great things of being in charge of your money is choosing who (if anyone) will help you manage it.

The choice isn’t always an easy one. How will you know that your planner is reputable and trustworthy? Perhaps more importantly … how will you know when she isn’t?

These five red flags are a good indication of whether the financial planner sitting across from you is someone you should trust with your money.

1. She Isn’t Certified

“There are a lot of good planners out there who aren’t certified financial planners,” says Samantha Vient, CFP®, of LearnVest Planning Services. “But the certification is becoming the industry gold standard, partially because CFPs® are required to adhere to the CFP® Board’s standards of professional conduct, which basically means we must put clients’ interests ahead of our own in all circumstances.”

It’s always a good idea to work with someone who has the CFP® designation, which is issued after completing a CFP® Board-approved personal financial planning curriculum, passing a rigorous exam issued by the Certified Financial Planner Board of Standards, meeting experience requirements and passing an ethics and background check.

2. He Offers to Manage Your Money for “Free”

Financial planners are usually paid in one of two ways: Either through upfront fees, which can be hourly, retainer or a percentage of the assets they manage for you, or through commission, which means the planner is paid each time he buys or sells an investment.

Fee-only payment structures are more desirable for most clients, as there’s no financial incentive (commission) for a planner to buy or sell, whereas working on commission encourages planners to make trades, rather than solely look out for your best interest—called a “fiduciary” duty. (You want to be sure that the planner you choose is a fiduciary.)

Sometimes commission-based brokers can represent their planning as being free of charge: “Nothing is ever free,” warns Vient. “You’ll likely be paying through fees and commissions on the investments they choose.”

To find a fee-only certified financial planner, visit the National Association of Personal Financial Advisors (NAPFA), which is the largest group of fee-based financial advisors.

LearnVest Planning Services also provides the services of fee-only certified financial planners. To see if they’re right for you, start with a free, 15-minute financial checkup.

 3. She Says She Outperforms the Market

“If a financial planner tells you that she can outperform the market, that’s a major red flag,” Vient explains. “In fact, due to government regulations, it’s illegal to advertise statements that promise a specific return.”

Outperforming the market—that is, getting better investment returns than the market average—is extremely difficult to do consistently, and requires taking a lot of risks with your investments. While some fund managers (paging Warren Buffett) have an aptitude for consistently outperforming the market, it’s a rare planner who can do the same—and results are never guaranteed. Either way, in the pursuit of these high returns, she’ll be exposing your investments to higher risk.

Instead, look for an advisor who, when looking at your portfolio, can advise on proper asset allocation based on your risk tolerance and time horizon, as well as through economic ups and downs.

RELATED: 9 Types of Financial Advisers: Which One Is Right for You

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  • Ellen Taney Bigelow

    I disagree with the first red flag. As a Chartered Financial Consultant®, I was required to take the same courses as the CFP candidates, plus a few additional courses. I had to fulfill an experience requirement, am bound to an ethical standard, continuing education requirements, and am qualified to sit for the CFP exam. I am growing tired of the articles claiming that a CFP is the only qualified expert, which implies consumers should avoid any other credentials.

    • Maximilian Johann Rooney

      Hi Ellen, I also have the ChFC and I agree with you. Both designations are very similar, legitimate, and high caliber. The CFP board exam is a big hurdle beyond the coursework… Why not do both?

    • 1abcde

      CFP is the Gold Standard! Period! The Chartered Financial Consultant designation is fine, but make no mistake the CFP is a much more rigorous designation to obtain.

      If you’re qualified to sit for the CFP board exam then why don’t you take it? My guess it’s too hard for you.

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  • Brian Smith

    Perfect article. Very useful for those of us currently looking for an advisor. For me the ultimate red flag would be number 3 “She says she outperforms the market”. Human advisors make mistakes. Very often. It is already hard for them to justify their fees. Machines are more effective in helping you earn money by investing. They eliminate human factor from the equation and help you follow one chosen path. If you are looking for a perfect wealth advisor, this article may also be useful for you: https://zenassets.com/blog/how-to-choose-a-wealth-manager/