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Four common mistakes people make when choosing a financial adviser

Analaura Luna

If you’re in the market for a financial adviser, and are after some handy tips, then read on! There are four common traps that people fall into when hiring a financial adviser – letting the adviser’s personality play too great a role in the selection process, failing to identify how the adviser will be compensated, not checking references and failing to understand the relationship between the size of the adviser’s client base and the amount of value you’ll receive as a client. Let’s take a closer look at each of these key mistakes.

Far too often people choose an adviser based on personality rather than their track record, their credentials and their expertise. Remember, you’re not hiring this person to be your drinking buddy; you’re hiring them to give you independent financial advice and guidance, so their personality should never be your primary concern.

The second common mistake is not finding out how the adviser will be compensated for the services they perform for you. Although there are bad apples in every category of adviser compensation, you can stack the odds in your favour by dealing with an adviser who works for a flat fee rather than a financial product salesperson who works for commission.

Not checking references is the next fatal mistake. It’s perfectly okay to check a potential adviser’s background by asking for references. Ask for at least three references who are clients that the adviser has worked with for at least three years. Then call these people and ask them how satisfied they are with the service that the adviser provides, what they like about working with the adviser and what they don’t like. Bear in mind that an adviser is only ever going to give you their best clients as references, and possibly even personal friends, so this will be an adviser-friendly sample. So if you hear any alarm bells from these references you should proceed with caution, if at all.

Finally, it is important to recognise the inverse relationship between the size of the adviser’s client base and the value you will receive as a client. All advisers have a finite amount of time and resources available to deliver value to clients and the more clients an adviser has the less value you will receive. You need to discuss this topic with the adviser and ascertain their strategy for mitigating this risk for you.

Choosing the right financial adviser is one of the most important money management decisions you will make in your life. It can be a stressful experience, but by looking past adviser personality issues, identifying how you will compensate the adviser, checking references, and making sure you are part of a small client community, you'll be well-positioned to find an adviser who delivers real value to you quickly and easily.

If you liked this article you might also be interested in these other articles about getting the right financial advice:

Breaking the cycle

Seeking advice: what you need to know about the process

Want more? Take a look at the rest of our money management advice articles.

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Tags: financial adviser, money management advice, independent financial advice

Author's Biography

Analaura Luna is an author, wealth adviser and founder of Your Family Your Money. Your Family Your Money’s goal is to simplify traditionally complex financial strategies, demystify financial jargon and debunk common financial myths, becoming every family’s first stop for financial advice, information and inspiration.