10 Questions to Identify Red Flags with a Financial Professional
“The person who is trustworthy in very small matters is also trustworthy in great ones; and the person who is dishonest in very small matters is also dishonest in great ones” (Luke 16:10).
Unfortunately, the financial world is filled with people who care more about making money than about helping people. It can be hard to distinguish people who are genuine versus purely interested in money. Here are 10 questions to ask to help with discernment.
1. How does she get paid?
Some financial professionals get paid for selling products, some from the services they offer, and others based on how much money they invest (manage) for you (often referred to as assets under management or AUM). Each method has conflicts of interest.
If someone gets paid for selling a product (commission-based), maybe life insurance or a mutual fund, she is motivated to sell you that product even if it may not be the best solution for you. If someone is paid by the service she provides, it depends if she is paid hourly or by the project. If it is hourly, she may be incentivized to take longer than needed on a project. If it is by the project, she may hurry through it and not be as thorough. If someone is paid based on assets under management, she is going to be motivated to encourage you to invest more with her.
Anytime we hire someone we have to weigh the benefits and drawbacks. No one is perfect and neither are the services she offers. What is more important is understanding what those services are and having a conversation about what that means for your working relationship with the professional. A professional who is honest and upfront about how she is paid and how that impacts how she does business is usually not trying to hide anything and confident that she is worth the money she is asking you to pay.
2. How big is her client base - how available is she?
The types of financial professionals and size of financial firms vary dramatically: from individual practices to large corporations. As you can imagine there are benefits and drawbacks to all of them. You will need to weigh these based on your specific needs. One thing to look at for all types is how many families or households the advisor manages, and how much time does that give her to focus on individual clients (ie. you). Are you able to hear back within 24 hours? How much access do you have? How do you communicate? Is there someone else to reach out to in an emergency if your advisor is not available?
3. Does she provide individual advice/portfolios or does everyone have the same thing?
Are you looking for someone who is customizing their advice and investment recommendations to you or are you okay with someone who uses pre-selected investment models? There may not be a right or wrong answer here, but it is important to think about.
4. Are there conflicts of interest or misaligned values?
As noted above, there will almost always be conflicts of interest. As you have conversations with your advisor, are these disclosed or avoided? What are they and how much do they matter to you? Are you looking for moral or Catholic specific investing?
More than that, are you comfortable with any assumptions they make? Do you get along well with them? Because financial professionals will be present for major milestones 一 births, deaths, home purchases and sales, etc. 一 it is important that you are comfortable with them and their values as this will influence the advice they give you.
5. Does she lead with products not questions?
This is a great question to figure out where her motivation lies. Maybe she does get paid based on what she sells, but if she starts with questions, at least she is trying to understand what you actually need. Someone who leads with a product when you haven’t disclosed a problem you have is not working in your best interest because she does not know you well enough to know what that is.
6. Does she promise specific returns?
Probably daily I find myself saying “we never really know what the market will do, especially in the short term” or “historically, if you give the market at least 5 years it will be higher than it is today.” You will notice the ambiguity in these quotes. I don’t like to avoid specifics, but when you are investing, nothing is a given. If someone is guaranteeing a specific return, please dig into this deeper and make sure you understand what it is and how.
For example, CD’s (Certificates of Deposit) do guarantee a specific interest rate for a specific period of time provided that you leave your money in the account for the specific period and follow any other rules that may be presented. However, if someone is talking about investing in the stock market, mutual funds, ETF’s (Exchange Traded Funds - a group of securities (stocks, bonds, etc.) traded like individual stocks), etc., they should not be promising anything. At any point, the market could have a correction, and your account could be worth less than you started with.
7. Is there too much pressure to make a decision right now?
Typically, when you are hiring a financial professional, you are looking for a long-term relationship with someone who understands your needs and is there to answer your questions. This decision can take time, and you should be given the time you need to make it. If someone is pressuring you into a decision, think twice about whether you see this relationship lasting. Also remember, you do not have to stay with your advisor. You should be free to end the relationship at any point and find someone new.
8. Does she ask about your whole financial picture and listen to your answers? Is she more interested in your money than you?
Ideally, a financial professional will help you create a plan and feel confident about your future. In order for her to do this, she needs to understand a lot about you and your lifestyle. When you meet with her, do you feel heard and understood? Does she genuinely care and hear your answers? Does she ask follow up or clarifying questions? Does she take notes? Does she seem to remember details from previous conversations?
All of these questions can help you identify if she is truly working in your best interest and putting your needs and desires at the forefront of her work for you.
9. Do you understand what she tells you?
The world of finance can be incredibly confusing. There are lots of acronyms, account types, and other information that often is not taught to us in school. Your advisor should also be a teacher of sorts. If you have questions, she needs to be able to answer them in ways you understand. You also need to feel comfortable asking questions and empowered to make the right decisions.
10. What are her credentials?
There are many different financial credentials. See which ones your advisor has and look them up to be sure they are the ones you believe you need. Unfortunately, there are many different titles people in finance use that are confusing or not as straight forward as they should be. Be sure you are working with someone who has been trained to work in the areas where you need help.
As much as I wish it was not so hard to find the right professional, it is imperative you are comfortable and confident in the people advising and helping to manage your money. Please take the time to vet them appropriately. You will not regret taking the time needed to find the right fit.
Erica Mathews is a CERTIFIED FINANCIAL PLANNER™ Professional with Financial Counseling Associates, a family-owned financial planning and investment management firm. She helps relieve financial stress with organization, automation and a plan, helping others manage their finances so they can live as God is calling them to. She lives in Colorado with her husband and four kids; they love CrossFit, rock climbing, gardening, and exploring. Erica’s email is erica@fca-inc.com