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What should I know before hiring a financial advisor?
Financial advisors are not legally required to act in your best interest at all times.
Some only need to meet a "suitability" standard, which allows them to recommend products that may benefit the advisor more than the client.
Many financial advisors earn commissions from the financial products they sell, which can create conflicts of interest and incentivize them to push certain products over others.
Financial advisor credentials like "Certified Financial Planner" or "Chartered Financial Analyst" indicate expertise, but do not guarantee the advisor will act ethically or in your best interest.
Fees charged by financial advisors can vary widely, from 0.25% of assets under management to over 2%.
Higher fees do not necessarily mean better advice.
Advisors often have minimum account sizes, such as $250,000, which can exclude smaller investors from obtaining professional financial guidance.
The investment portfolios recommended by advisors may be heavily weighted towards products that generate higher commissions for the advisor, rather than optimizing for the client's needs.
Many financial advisors lack specialized expertise in complex areas like tax planning, estate planning, or small business strategies, despite marketing themselves as full-service providers.
Robo-advisors, digital platforms that provide automated investment management, can offer professional-level investment advice at a much lower cost than traditional human advisors.
Advisors paid solely through commissions may be incentivized to churn client accounts, resulting in excessive trading that generates fees but not necessarily better returns.
Financial advisors often have affiliations with specific brokerage firms or investment products, which can limit the range of recommendations they provide.
The qualifications and disciplinary history of a financial advisor are publicly available through the SEC's Investment Adviser Public Disclosure (IAPD) website.
It's important to understand the difference between a "fiduciary" advisor, who is legally required to act in the client's best interest, versus a "suitability" advisor, who only needs to recommend suitable products.
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