3 Financial Advisor Red Flags You Should Watch Out For

Thinking of getting a financial advisor? Here are some red flags to avoid, so you can make sure your money is in the right hands.

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A financial advisor can be an important part of your financial support system. But financial advice isn't free. The average fee-based financial advisor charges 1 percent of all assets under management (AUM), and many require you to have an account minimum of $50,000 or more to qualify for their services.

While there are affordable alternatives to traditional financial advisors such as robo-advisors, and online financial planning services, independent financial advisors can be valuable for managing investments, helping you set and reach money goals, and even helping with estate planning. A 2019 study by investing platform, Envestnet PMC, estimates that an advisor can add 3 percent value on investments each year.

However, finding a financial advisor that you trust is crucial for reaping the benefits of having one. The process will likely require research and thorough vetting on your part. "It is essential to look at the red flags noted because these could be signs that the person offering advice has a conflict of interest, might not be giving advice that will work best for you, or is overlooking essential expertise," says Alissa Krasner Maizes, financial planner and founder of investment advisory firm, Amplify My Wealth.

Here are the red flags you should watch out for while seeking out a financial advisor—so you can be sure your money is in the right hands, and get guidance from someone who actually wants to help you build your wealth and reach your financial goals.

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They are not a fiduciary.

If a financial advisor is not a fiduciary—someone who is legally obligated to act in your best interest, and put your needs first—that is a red flag.

"Not all financial advisors are fiduciaries," says Maizes. "Therefore, they do not all have to put their client's needs first, including full disclosure and transparency regarding any potential conflicts of interest," she explains.

Look for a Registered Investment Advisor (RIA), suggests Brian Colvert, CFP, and CEO of Bonfire Financial, LLC. RIAs are legally required to act as fiduciaries. "Beware of a dually registered or a hybrid advisor. While they are registered investment advisors, they are also licensed through FINRA (Financial Industry Regulatory Authority)," Colvert warns.

"They wear two hats. They can have accounts which they are acting as fiduciaries on and then have another account with the same client in which they act as brokers and only follow the suitability standard," says Colvert. The suitability standard, according to FINRA (a self-regulatory organization), only requires that an investment is suitable for the client and their personal circumstances, and not necessarily one that is in their best interest—like the fiduciary standard regulated by the U.S. Securities and Exchange Commission (SEC).

He says hybrid advisors can have many conflicts of interests, such as selling insurance products and sharing profits with mutual fund companies.

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It is unclear how the advisor makes money.

If the financial advisor does not have a clear explanation for how they make money, that's likely a red flag. This is another benefit of having a financial advisor who is a fiduciary, because they have to disclose how they are compensated upfront. In other words, they make money only from their fees.

"Fees vary but generally average somewhere between 1-2 percent of the total value of the investments under management, not a commission," says Colvert.

Certified financial planner Cameron Church says he left a firm because of this red flag. "It was difficult to explain to people how we got paid because being fully honest meant it was a long explanation," says Church. "If an advisor can't tell you how they get paid in one sentence, that's a red flag," he adds.

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They are trying to sell you something.

"If an advisor tries to get you to buy or invest in something with their company's name on it, I would see that as a huge red flag," says Church. He suggests looking for an independent advisor who doesn't get paid more to sell a particular brand.

Maizes says that if a financial advisor suggests a plan that emphasizes annuities, life insurance, or actions that would generate a lot of fees for them, that's a red flag. "Instead, a diversified portfolio aligned with a buy-and-hold approach of investing in low-cost investment vehicles like mutual funds and ETFs generates fewer fees and taxable consequences," she explains.

An advisor who gets commission from selling certain products or investments might not always act in your best interest, as their advice to you might vary based on their earnings. "Individuals need to determine what compensation structure best aligns with their needs," adds Maizes.

Before you go ahead with an advisor, make sure you look them up on the SEC's Investment Advisor Public Disclosure and FINRA BrokerCheck to make sure they are legitimate and learn more about their qualifications and state registrations. You can also check out the SEC Litigation Database to see if the advisor has any legal actions against them.

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