How to Avoid Unsuitable Financial Advisors

Before you choose a financial advisor, think about your compatibility with them and how you want to work

How to Avoid Unsuitable Financial Advisors
How to Avoid Unsuitable Financial Advisors
Titlee Sen - 16 June 2021

It's tempting to choose the first financial counsellor you encounter when you need help with your money. Even though a financial advisor can assist you in achieving your financial objectives, you must participate actively in the relationship. It is wiser to find someone who shares your aims and priorities and assist you in achieving your objectives in the manner that you choose. Knowing how to avoid typical pitfalls when hiring an adviser might help you relax and save years of tension.

1. Understanding Mode of Payment

The Terms "Fee-Based" and "Fee-Only" are sometimes used interchangeably. When it came to naming and describing the various categories of financial consultants, the financial planning industry did not do customers any favours. If there's one major distinction you should be aware of, it's this: The terms "fee-only" and "fee-based" are not interchangeable.

Financial advisers who work on a fee basis wear two hats. When they are fiduciary, they demand a clear fee on occasion (for example, a percentage of the assets they are managing). They may even remove their fiduciary face and offer you a product in exchange for a commission. This conflict of interest is created by the commission-for-sales model.

Fee-Only financial advisors are only permitted to charge a clear fee and are not permitted to market items for a commission. A proportion of the assets under management, a yearly retainer, or an hourly cost might be charged. In any case, you'll always know how much you're spending and you'll never have to wonder if they're recommending a financial product just to get a fee. There are fewer conflicts of interest when you deal with a fee-only financial advisor.

2. Fiduciary or Not

A fiduciary is a person who is morally obligated to behave in the best interests of another person. This responsibility eliminates worries about conflicts of interest and makes an advisor's counsel more reliable. They work under the "suitability test" when they are not fiduciaries.

Suitability simply implies that they must show that a product is appropriate for you. They don't have to analyse the recommendation's costs, quality, or predicted investment return. Under the "suitability standard," financial advisors can market goods in exchange for a commission. This should be made clear to you, but the form of remuneration can lead to significant conflicts of interest.

3. Speciality and Strategy

Some financial consultants are appropriate for company owners or individuals with a high net worth, while others specialise in retirement planning. Some may be ideal for young professionals looking to establish a family. Before you sign anything, be sure you know what an advisor's strengths and shortcomings are.

Each counsellor has his or her methodology. Some counsellors may recommend risky investments, while others are more cautious. If you like to invest entirely in equities, an adviser who likes bonds and index funds will not be a good fit for you.

4. Importance of Credentials

Always inquire about your advisor's licences, examinations, and qualifications. Because of their affiliation with a prominent business, an adviser may look knowledgeable and competent. Working with a reputed firm's adviser may provide stability as well as superior tools and knowledge. Big firms, on the other hand, have large commissions tied to them, making impartiality difficult for the adviser. Choose an adviser based on how well they meet your needs, not on their brand.

The majority of advisers are eager to provide references to potential customers. It simply takes a few minutes to call references, and it might make you feel more at ease while handing over the keys to your bank account.

5. Realistic Expectations and Returns

Be wary of any financial counsellor who claims to be able to outperform the market. It is nearly hard to regularly beat the big stock market indices. Furthermore, after costs, most actively-managed mutual funds fail to outperform their benchmark.


Past success is no guarantee of future outcomes. It's also possible that the financial advisor just searched up the best-performing assets at the time to serve as an example. Any financial advisor who claims large profits should be viewed with caution. You want an adviser who can help you focus on the areas you can control, rather than attempting to beat the market: fees, asset allocation, asset placement, tax efficiency, and risk tolerance.

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Outlook Money
October 2021

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