10 Biggest Mistakes to Avoid When Hiring a Financial Advisor
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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte. And today we are talking about the 10 biggest mistakes to avoid when hiring a financial planner. And today's episode is going to be relevant even if you manage your own investments and don't currently use a financial advisor. Because when life gets complex enough, you're likely going to lean on a professional, even if it's just for a short-term pay-by-the-hour type relationship, to help answer a few questions.

If you want to read the full details, go to youstaywealthy.com slash 38. And if you have any questions for a future show or just want to say hi, shoot me an email at podcast at youstaywealthy.com. Okay, let's dive in.

So if you're listening to the show, you've likely heard the story of my real estate purchase gone bad a few years ago. If you haven't heard it, you can go to youstaywealthy.com slash 14. And you can hear my interview on the Stacking Benjamins podcast, which is a huge finance podcast in iTunes.

So go check that out if you want to hear the whole thing. If not, I'll give you the cliff notes. In short, my wife and I bought our first home a few years ago. It was brand new construction. And within a few months, the house started moving and cracking. We had foundation issues and essentially the house was starting to fall down.

Yes, we had it inspected. Yes, we had a realtor and the construction was actually permitted by the city of San Diego. But we missed just one small detail that would have saved us from about $60,000 in legal fees. All we needed to do during the inspection process was to ask the seller for a copy of the soils report.

Apparently, hindsight's 20-20, but whenever a new foundation is built, geotechnical engineers are typically brought in to test the soil and provide a report to the people building that foundation so they know what type of soil they're dealing with and what precautions they may need to take.

So if we would have asked back then during the purchase for this soils report, we would have found out pretty quickly that they didn't have one. So at that point, we could have asked them to either go and get one or we could have walked from the purchase.

After sharing my story hundreds of times at this point, it feels like I've learned that it's actually pretty common to ask for a soils report when buying new construction, especially when it's a house flipper kind of deal and it's not one of these big commercial developers.

And so I just keep asking myself, like, how could I have missed this? If this is common knowledge, if this is something I should have known, how could I have missed this little detail that would have allowed us to escape this whole problem?

Like the world of real estate, the financial advice business can be pretty complex. There are a lot of moving parts. There's a lot of industry lingo that we've touched on on a few episodes before. And if you've never worked with a financial planner before, you just simply might not know what questions to

ask to avoid a disaster like I experienced buying my first home. And it may not be to that extreme. But we're not talking about just a house here, we're talking about your financial well being you, you work really, really hard for your money. And you work really, really hard to save it. I think if you're gonna hire a professional, you want to be very careful as to who you hire. And I think there's some questions then and some things that you need to look for before actually pulling the trigger and handing your financial life over to somebody. So

That's why this topic is so important to me. And that's why I put together this guide for consumers. And if after listening to this episode today, you want to download the PDF version of everything that we're going to talk about today, just go to youstaywealthy.com slash podcast.

38. And you can go and download the PDF there, you can print it out, whatever you want to do with it. I'm not asking for your email address or anything like that. Just go to the website, click the link, and the PDF will show up and you can download that to your computer.

So let's get into it. Again, we're going to talk about the 10 biggest mistakes to avoid when hiring a financial planner. And these are just 10 things that you should be looking for when you set out to find somebody. Or if you have a current financial advisor, maybe you're going to learn some things that you might want to ask them to make sure that you're in the right place.

Mistake number one is confusing the terms fee-based and fee-only. And this gets into my comment about all the industry lingo that's out there. And the financial planning industry has not done consumers any favors when it comes to choosing names and designations. But there is a very, very big difference between a fee-based financial advisor and a fee-only financial advisor. So

So a fee-based financial advisor might generate their income a couple different ways. They might give you advice and charge a fee for that advice. They might charge an hourly fee. They might charge a one-time project fee.

They might charge a percentage of assets that they're managing for you. But any way they charge, that fee is extremely transparent. You know exactly what you're paying and you know what you're getting in return. So that's one way that these fee-based financial advisors make money.

but they also make money another way. The other way would be selling financial products in return for a commission. The simplest example might be selling

selling you just a simple term life insurance policy. And if they sell you that policy, they get a commission from the life insurance company. It might appear to you that it didn't cost you any money. You didn't write a check to the financial advisor. And sometimes you might even scratch your head and wonder like, why did he...

or she drive all the way to my house and help me with all this paperwork and sign me up for this insurance policy. And how did they even make money? And that's because they earned a commission. The life insurance company paid them a commission on the back end to sell their product.

When somebody is selling products in return for commissions, and maybe you've already caught on to this, there are a lot of conflicts of interest. They might be more inclined to sell you a product that pays them a higher commission. There might be 10 different life insurance companies, but life insurance company A pays a higher commission than life insurance company B. And they might be inclined to go ahead and put you at company A because they're going to make a little bit more money. So,

Fee-based financial advisors have these two channels, these two ways that they can make money, and you don't really know what hat they have on on what day. One day they might have a very transparent fee, and you might pay them that fee in return for very objective advice. And then the other day they might show up with this really cool product to sell you, and they might earn a commission on the back end, and you might not even know how you're paying for it.

If you're not paying something, that should be a red flag to you, that you are paying it in one way or another. It just might not be transparent. So really simple, fee-based financial advisors, they wear two different hats. Sometimes they're giving you transparent advice for a transparent fee. Other times they're selling you a product in return for a commission. You just never know what hat they're wearing on what day. A fee-only financial advisor, right?

only charges a transparent fee in return for objective advice. So you have a financial problem or many financial problems and you pay this person a fee. Again, it could be an hourly fee. It could be a project-based fee. It could be a percentage of the investments that they're managing for you, but it's a transparent fee. And in return, they're giving you advice and helping you solve your problem. That's it.

If you need life insurance, it's their job to help you go out and shop the market and go find you the cheapest life insurance policy that matches your goals. They're not going to get a commission for helping you do that. You're already paying them whatever fee structure you set up with them. Let's say you're paying them a percentage to manage your investments.

if you need a life insurance policy, they're going to go help you get that life insurance policy. They're not going to get paid on it because you're already paying them a fee to help with your financial life. So in that situation, you can rest assured that there's not really any conflicts of interest. It's their job to go out there and shop the market and find the best solution at the best price and help you secure that. And you don't ever have to scratch your head and wonder,

Is this person trying to make an extra buck or meet a sales quota, or are they really trying to help me? So if you do hire a financial advisor or if you have a financial advisor, make sure that that financial advisor is fee-only. And just listen really, really closely for that word fee-based because advisors know that these terms are confusing, and a lot of them can get away with just saying they're fee-based. But you really want to look for that word fee-only.

All right, mistake number two, choosing a financial advisor that isn't a fiduciary 100% of the time. Most people in America at this point have read the Tony Robbins book. He actually has two books that came out and he really preached the word fiduciary. So we hear more and more from consumers that, hey, I read the Tony Robbins book. I heard this cool term fiduciary. I want to find somebody who's a fiduciary. And that's really, really, really important.

What Tony missed in his first book is that sometimes financial advisors act as a fiduciary one day, and the other day they don't. So again, similar to that term fee-based, sometimes these advisors are wearing two different hats.

And what you want to look for is a financial advisor that's a fiduciary 100% of the time, not some of the time, but 100% of the time. If you find a financial advisor that is fee only, chances are they are a fiduciary 100% of the time, you obviously want to

make sure and ask them the question. There are some things you can have them sign to verify this. You can also look up their form ADV and really dig deeper. But I think you can ask these questions and hopefully get an honest response. So mistake number two, make sure that you, it's not really a mistake, but a suggestion that you hire a financial advisor that's a fiduciary 100% of the time.

Mistake number three, assuming that all financial advisors have a college degree. So this is crazy. I had no idea. But when I got my first job way back when I worked for a very large wealth management firm and I was hired with a group of people, there might have been, I don't know, 10 or 15 of us that were all hired at the same time. And a number of them didn't have a college degree. Now, they're very sharp individuals. Some of them are still friends today, so it's nothing against them. But they're very sharp individuals.

But I was kind of like, you know, I'd spent the last four years going to college and getting my degree and working really hard for that. And my parents paid a lot of money for it. And I was just kind of scratching my head wondering, like, how, how did I get a job at this publicly traded, very well known company?

global wealth management firm, and they didn't even have a college degree. But a lot of these firms, they're looking to hire salespeople, not necessarily really good, talented financial advisors. So don't assume that all financial advisors have a college degree. There are over 300,000 advisors in the US, and I promise you, not every one of them has a college degree.

Maybe that's not super important to you. I'll let you decide that. But this is just one of the things to look for and to consider. And kind of in that same vein, you can even narrow it down even deeper and you can look for financial advisors that have the Certified Financial Planner designation or the CFP.

And the reason I bring that up is because the only way that you can get the CFP designation is to have a college degree. So you don't have to ask them directly, but if somebody has the CFP designation, you can already assume that they have a college degree. And what's crazy is only about 25% of financial advisors have the CFP designation. So

starts to weed out some of the advisors that you might be interviewing or looking for. The CFP is not the end-all be-all. Not every CFP is a good fit for everybody. So you need to do some more due diligence, but it's a good place to start, especially if you want to make sure that your financial advisor has a college degree.

All right, mistake number four, not investigating the underlying costs of your investments. We've talked about this way too much on the podcast, but fees are really, really, really, really important. And not just the fees that you're paying a financial professional.

but the fees that you're paying to get your investments managed. Now, even if you self manage your investments through a platform like Schwab or Vanguard or fidelity or something like that, you're still incurring fees. None of this is free. There's no such thing as free. You might see some advertisements that say otherwise, but I promise you it's not free. And I, and we will do a podcast episode called free trades aren't free, but I'll get off that for now. And I'm

I just want you to focus on investigating the underlying costs of your investments. So most people listening have an investment account of some sort. Maybe it's a 401k at your work. Maybe it's an IRA at one of these brokerage firms. It doesn't matter where it's at. Open up your recent statement and look for the ticker symbols.

Take those ticker symbols and go to morningstar.com. That's a free website. And you can type in the ticker symbol for the investments that you have. And what you're looking for when you type in that ticker symbol is something called the expense ratio. And Morningstar calls this expenses. So type in the ticker at morningstar.com and then look for the little header that says expenses. And you'll see something in the form of a percentage.

You might see an expense as high as 2%. You might see something as low as 0.03%. Fidelity actually has some funds that are now free that cost 0%. So you may come across that. But

The importance isn't to just go and buy all the 0% funds, but step number one is just know what you're paying, know what you're buying, know what you own, and know what it costs. That's just step number one. Once you have that information, you can start to dissect and determine, am I in the right place? Is this the right investment? Maybe you can get the same exact investment that you have

but just at a cheaper price. So you can start to do some more homework and figure that out. But step number one is take your investment statements, go to Morningstar.com, plug in the ticker symbol, and go see what you're paying. Now, kind of general rule of thumb, I'd like to see most of the expense ratios under a half of a percent, so under 0.5%.

I'd like to see them even lower if possible, but that's just kind of a starting place. If you have investments that are over 0.5%, it's probably time to look for a replacement, a cheaper option, because Vanguard has done extensive research on this. The best predictor of future returns is the cost of your investments. In other words, lower cost investments,

should typically do better than higher cost investments. Now, nobody has a crystal ball. There might be some high cost investments that outperform over certain periods of time. But if you want to put the odds in your favor and you want to be in the best possible position for success, you

all the academic research says, buy the lower cost funds. So, you know, there's no hard line in the sand here, but I'd say just start with, if anything costs more than 0.5%, start to look around for some replacements. Ideally, I'd like to see the cost get below 0.25% as a weighted average of your portfolio. But again, this is just a starting point. And really, I just want you to know what you're paying. That's really just kind of step number one.

one, it's kind of like tracking your expenses. I'm not telling you to go put yourself on a budget. But step number one is just what are your expenses day to day as a family. And let's just start there. And we'll have another episode on that as well. But knowledge is empowering, it's important. And you might start to make some changes just by having that information. So that's mistake number four is not investigating the underlying costs of your investments.

Mistake number five, letting your financial advisor lead with investments. So everybody wants to talk about investments. Anytime somebody reaches out and asks for my help, the first thing they say is, can I send you my investment statements? Investments, that's the fun part. That's the stuff everybody wants to talk about. That's the stuff that CNBC is talking about. That's the sexy part of financial planning is the investments. But

Like a doctor, financial planners need to diagnose you first before they can start prescribing these solutions. So if you go and meet with a financial planner and the first thing they talk about is their investment strategy or dissecting what you're currently invested in, that should start to kind of send some red flags. Like imagine going to the doctor, you sit down in the doctor's office and

And then they start rattling off a bunch of prescriptions that you might consider taking, that you might think that's a little odd. You're like, don't you want to ask me some questions first? Don't you want to take my blood? Don't you want to maybe do some tests? Why are you all of a sudden prescribing or suggesting that I take these prescriptions? So it's the same thing. If and when you meet with a financial planner or financial advisor, make sure that they're leading with prescriptions.

financial planning that they're asking about your financial goals, your financial life, what's important to you, you know, what mistakes have you made in the past? Have you worked with other financial planners before? Uh,

Where do you want to be in 15 or 20 years from now? You know, there's a lot of really good questions that financial planners can ask to start to pull some of this really important stuff out. And then that financial plan, those answers to those financial planning questions should then start to drive the investment recommendations or plans.

the prescriptions. So mistake number five is letting a financial advisor lead with investments. They should lead with financial planning first, and then the investments should come second. If you listen to our last episode, we talked about the importance of an investment policy statement and the financial plan should influence the investment policy statement, which would then influence the investment portfolio.

You don't want to just change the investment portfolio out of nowhere. You want to make sure that the financial plan is changed first. That's the first thing that should change. So same thing, hiring a new financial planner, make sure they're leading with that financial plan first. All right. Mistake number six is choosing a financial firm based on name recognition. Now,

There are a lot of financial firms out there that people know by names, and I don't want to just sit here and bash on all of them. There are some really, really good firms out there and some really, really good people that work for those firms, and some of them are really good friends of mine. So I don't want to just sit here and bash on these large firms. But more often than not, the size of the financial firm is directly proportional to their fees.

Now, why is that? Well, number one, a lot of them are publicly traded firms. So their goal is to make money for their shareholders, not necessarily make money for their clients. They need to be profitable. They need to show that they're making money for the firm and for their shareholders.

A lot of these big firms need to get the word out. They need to build their business. And so they have big advertising budgets. They have sales teams. They have marketing departments. And in the end, the client ends up kind of sucking up a lot of these expenses. They get passed on down to you. So again, it goes hand in hand with a lot of the things I've already talked about, you know, making sure you know what you pay for, making sure you're working with a fee organization.

only financial planner, making sure you're working with a fiduciary. But even if they check all those boxes, it still might be a big firm that has some conflicts of interest, like again, being publicly traded, and their duty to the shareholders and not necessarily to the client. So just be a little extra careful when you're working with one of those big brand name firms and really make sure you're asking the right questions, especially some of the stuff that we're talking about today.

All right, mistake number seven is blindly hiring a financial advisor with an insurance license. I'm willing to bet that just about everybody, everybody that I know, everybody that's listening to this podcast has been approached at some point in their life

by a life insurance salesperson knocking on their door or they got your name from a friend or something and they called you and they started talking to you about life insurance. It's their way to open up the conversation about financial planning and financial advising. They're leading with insurance and a lot of them only have an insurance license. That's all they do is sell life insurance.

Financial planning is more than just insurance. Insurance is a piece of the financial plan, but there are a lot of other things to take into consideration before you just go blindly buying life insurance. You may not need life insurance. So if you're working with an insurance salesperson or you've been approached by an insurance salesperson or you're thinking of calling a financial advisor who works for an insurance firm

firm, just be a little extra careful. Again, make sure you're asking the right questions because sometimes these firms, these salespeople will lead with life insurance. And just like we don't want somebody to lead with investments, it just doesn't really make sense.

Life insurance shouldn't be the first topic of conversation. There are so many other things to tackle before you write that life insurance prescription. Life insurance is really often oversold. A lot of people just have too much of it, and we do more unwinding than we do purchasing life insurance. So

Be careful, again, mistake number seven, blindly hiring a financial advisor with an insurance license. Maybe the last thing I'll say on this topic is at my firm, we help our clients go and secure life insurance, but we don't have a life insurance license. We are certified financial planner professionals. We have an expertise in insurance. We will help our clients go find the best policy for them, but we don't get paid on it. We don't get a commission because again, clients are already paying us a transparent fee.

So I can operate, I can make recommendations, I can help my clients get life insurance, but I don't need an insurance license. The only reason I would need an insurance license is if I wanna get that commission from selling that life insurance product.

So you might think you need life insurance and that's great, but that doesn't mean you have to go to a life insurance person. There are plenty of fee only certified financial professionals out there that can help you objectively shop for the right policy and the lowest cost policy.

All right. Mistake number eight, working with a friend or family member. Now, working with a family member or friend doesn't always spell doom. There are times when it works out really well. There are some of my family members and friends that work with me. So it can work out, but you do need to be a little careful before going down this path. And

I kind of like to let them make the decision. I never want to reach out and try to convince them that they should become a client. I want to let them make that decision. If they feel comfortable working with me as a family member or as a friend, I want to let them make that decision because

you know, you're going to be around this person quite a bit and your working relationship might look a little bit different than your personal relationship. And sometimes those can clash and some people have a hard time with that. So, you know, it's nice because you might be able to trust that person because you're really close with them. But

you also may not be able to open up completely either. So just ask yourself before, maybe not ask yourself, maybe just try to picture what that might look like working with a family member or a friend. Imagine going into their office and sharing with them your deepest, darkest financial secrets and really laying everything out there on the table. I

And then imagine going to have dinner at their house or going to play golf with them or having Thanksgiving dinner with them. How does that make you feel? Are you totally okay with that? Does that make you feel uncomfortable? Just kind of take note of how that might feel. I know that if a family member reaches out to me or a friend reaches out to me and they're like, hey, you know, I'm just not super comfortable sharing all of this with you. You're a really good friend. Do you have any recommendations for other financial advisors?

advisors that you think would be a good fit. And I'm more than happy to put them in the right direction. I would never, ever, ever convince somebody that they have to work with me because I'm a friend. So you might still reach out to that person and see if they know of somebody who they can refer you to. And so they might be a really good referral source, but just be careful before you go just jump and give your money to a friend or family member and just know what the consequences are

Might be. You might even put some guardrails in place to prevent your friendship from getting in the way. So just think it through before you jump in. Right. Mistake number nine, believing advisors who want to help you beat the market. So if you ever read something, an article or you see an ad or commercial or you meet somebody at an event, right?

who immediately tells you that they have this really awesome, super cool strategy that can beat the market. And they've done so well over the last 10 years or five years or 20 years, whatever it might be. And if that's the conversation that they're having with you, that might, that should make you kind of think twice before working with them. Number one,

What's happened for the last 10 years may not happen for the next 10 years. So even if you meet somebody who can accurately show you that they've beaten the market for 10 years, doesn't mean they're going to go and beat the market for the next 10 years. Past performance doesn't guarantee future results. I think everybody's aware of that, but there's a ton of academic research that supported this. And it's actually shown that mutual funds that have outperformed mutual

like the S&P 500, the ones that have outperformed over the last five and 10 years go on to underperform over the next five and 10 years. And I'll link to the study in the show notes if you want to read more about why that is and the data behind it. But you don't want to work with somebody who their whole philosophy is beating the market. Beating the stock market is ridiculous.

really, really, really, really challenging. And I prefer to focus on the things you can control. We can't control what Amazon's going to do or what Apple is going to do or what the Fed's going to do with interest rates or what kind of economic policy is going to be put into place. We can't control any of these things.

I'd rather focus on the things we can control, like keeping our costs really, really low in a portfolio, something called asset location, which is what types of investments should go in what types of accounts, mitigating taxes, properly constructing a portfolio, all these things are going to start to put the odds in your favor, where beating the market is just a

a coin toss. It sounds really interesting. It's a really good story, which is why people kind of latch onto it, but just be really careful if somebody is leading the conversation with, Hey, we've got this super cool strategy that can beat the market.

All right, mistake number 10. Mistake number 10 is blindly going out there and hiring a financial advisor based on a recommendation. Now, let me kind of explain this one. There are some really, really good websites out there to help you narrow down the type of financial professional that you should be working with.

If you don't want to use one of these websites that I'll share in a minute, of course, you can also just go to Google and type in some keywords to start to kind of zone in on the financial planner that's needed for you. But if you want some help, instead of just asking your neighbor who they work with or your friend at work who they work with, if you want to start to do some of your own research, I'm going to recommend three websites that you can go to. And what I love about these three websites is

They already check most of the boxes we've already talked about today. Most of them are going to be CFP professionals. All of them are going to be fee only. All of them are going to be a fiduciary 100% of the time. So what you're going to look for when you go onto these websites and search for a financial planner is...

you're gonna look for their experience, their specialties. Who do they work with? Do they work with millennials? Do they work with retirees and baby boomers? Do they work with doctors? So you can start to kind of zone in on their specialties. You'll also be able to zone in on their fee schedules. Do they charge a percentage of assets that they're managing for you? Do they charge an hourly fee? Do they do project fees?

And so you can start to pick and choose what features or what things are important to you when hiring somebody. So again, you can get some recommendations from a friend or a family member or a coworker, but I would really, really encourage you to do your own research as well and use one of these websites. And again, there are others that are out there and Google can work as well. But the three websites are number one, napfa.org.com.

That's N-A-P-F as in Frank A.org. So napfa.org is a great organization. Everybody on there is going to be fee only. Everybody on there is going to be a fiduciary. You can put in your zip code and find somebody near you.

The second one is xyplanningnetwork.com. Now, XY does stand for Generation X and Generation Y, so it tends to skew a little bit younger, but there are plenty of advisors on there like myself who focus on an older demographic, a retiree, someone kind of later in life.

So you can kind of zone in and narrow in there on somebody that has the expertise that you're looking for. So xyplanningnetwork.com. Again, you can put in your zip code, you can check some boxes and really filter for the type of professional that you need.

And then lastly, the Garrett Planning Network, which is garrettplanningnetwork.com. And the cool thing about Garrett Planning Network is all of their financial professionals will do work on an hourly basis. So if you're one of these do-it-yourself investors, you don't really want to work with a financial advisor, maybe your life is just not that complex and you just have a few questions and you just want to pay somebody by the hour, the Garrett Planning Network is a great place to go.

So mistake number 10, don't just trust your coworker with whoever they're working with. You're going to go work with, do some of your own research, use some of these websites, use Google, whatever it is to start to do some research and put the things that I've talked to you about today into place and start asking some of these really, really good questions.

So hopefully that was helpful for you guys today. Again, if you want the full details, if you want to download the PDF version of this podcast, you can print it out. And when you can't sleep at night, you can pull it out of your desk. Just go to youstaywealthy.com slash 38. And as always, shoot me an email at podcast at youstaywealthy.com. If you just want to say hi, shoot me some questions, any feedback. I love everything that I've received so far. I really appreciate all the support.

all of your support and I will see you again in two weeks.