4 Dangerous Myths About Financial Advisors

Markets Motley Fool

Choosing a financial advisor will have a major impact on your financial life. The right advisor will bring you closer to your financial goals; the wrong one could destroy your hopes of ever hitting those goals. And if you believe any of these four common myths about financial advisors, you're far more likely to choose the wrong one.

Continue Reading Below

1. Financial planners are qualified

One of the most persistent myths about financial advisors is that anyone identifying as a "financial planner" must have met educational requirements, passed tests, have related experience, and so on. In reality, anyone at all can call themselves a financial planner -- it's not one of the regulated titles for financial advisors.

When you meet with a prospective financial advisor, look at the person's business card to see if it includes any letters after the name. If not, ask what the advisor's certifications are. The gold-standard certification for financial advisors is the certified financial planner (CFP); advisors have to meet heavy-duty educational and experience requirements to earn this coveted title.

2. Financial advisors are required to do what's right for me

A fiduciary is required by law to act only in a client's best interests. Unfortunately, not all financial advisors are fiduciaries. If a financial advisor doesn't consider him or herself a fiduciary, then there's nothing stopping them from putting their own interests first: for example, recommending a product that pays the advisor an enormous commission even though it's not the best product for you.

Continue Reading Below

Financial advisors who manage retirement savings will soon be required to act as fiduciaries for their savers. For now, ask every advisor if he or she's a fiduciary before you hire one, and if the answer is no, go somewhere else.

3. Financial advisors must have clean records

Financial advisors might lose their certification if they misbehave in certain ways, but there's nothing stopping them from continuing to work as advisors in the future. They just won't be able to use their previous title. And "financial planners" without any certification to protect can keep on working right up until the authorities drag them off to prison.

The best way to avoid these repeat offenders is to stick with financial advisors who have one of the regulated titles and look them up on BrokerCheck to make sure they have clean records. It's also helpful to check references from a prospective advisor's former and existing clients.

4. Some financial advisors work for free

There's no such thing as a free lunch (or free financial advice). Sure, some financial advisors will meet with you and give you advice without charging a fee, but those advisors usually end up being the most expensive in the end. An advisor who isn't charging you a fee is typically making money from commissions off of the products that he or she sells you. The problem is, a commission-based financial advisor has a built-in conflict of interest.

Financial advisors who work on commission have to decide whether to recommend the product that's right for you or the product that will make them a fat commission. Sadly, many of these financial advisors will end up doing the latter. That's why a fee-only financial advisor is by far the best choice. Fee-based financial planners will typically charge you a small percentage of your total balance per year to manage your investments for you. Because their fee goes up if your investments grow in value, these financial advisors are motivated to do well by you.

The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.