You may think the best financial advice is that which makes you the most money. Think again. You may get lucky on bad advice but at some point, the luck will run out, putting your financial future into jeopardy. Separate the good from the bad by making sure the financial advice you’re receiving checks all five of these boxes.

1. It’s aligned with your goals. If your financial advisor doesn’t know what your investment goals are, how can you be certain that advice is right for you? If your advisor doesn’t ask about these goals—such as when you want to retire and how—your plan will not be customized to your distinct needs. A good relationship and easy communication with your financial advisor is also essential to ensure your plan is updated with your latest milestones and growth goals in mind.

2. It sounds reasonable. Free or cheap financial advice is usually a telltale sign of bad financial advice. After all, becoming an investment professional requires school, certification exams and continuing education. Another red flag is when an advisor promises unrealistic returns. As the old adage goes: If it seems too good to be true, it probably is.

3. Compensation is transparent. Investment professionals are paid through fees, commissions or both. According to the National Association of Personal Financial Advisors (NAPFA), fee-only advising is the most transparent and objective, and in fact, NAPFA members aren’t allowed to accept commissions for their work. That doesn’t mean commissions are a sign of bad advice, though. The proof is in how transparent the advisor is willing to be. If he or she is not forthcoming about details, that could be a red flag.

4. It serves your best interests. Believe it or not, many investment professionals do not have a fiduciary duty to act in their customers’ best interests. Many brokers, for example, operate under a suitability standard—the advice they give is suitable for a customer like you, but not necessarily specific to you. This advice can be harmful to your portfolio if the financial advisor has his, not your, best interests at heart. According to a 2015 report from the White House Council of Economic Advisers, non-fiduciary advice can cost investors 1 percentage point of their return annually. The quickest way to find out if your financial advisor is a fiduciary is to ask. If the answer isn’t straightforward, you might seek advice elsewhere.

5. It’s easy to understand. Be wary of economic jargon designed to get you to say, “OK, that’s over my head, but I trust you.” Good investment advice is something you can understand. If you can’t understand it but want to, a good investment professional will work with you until you do.

Your relationship with your financial advisor is an important one that impacts the fate of your finances, retirement savings, and family legacy. It is important to trust the management of your wealth to a financial advisor who is reliable, honest, and has your best interests at heart.


The FMB Advisors Blog

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