The top 5 Mistakes you should avoid when selecting a financial planner

The Top 5 Mistakes you Should Avoid When Selecting a Financial Planner

Selecting the right financial planner can be regarded as one of the most important steps in building personal financial security. A good financial planner can assist you in different areas of your life; managing difficult financial situations, creating a plan for your retirement and realizing your dream life. Nevertheless, the wrong planner can cost a fortune that should have shaped the most important sector of your financial life. Following is a list of common errors that you must avoid when choosing your financial planner.

1. Hiring a Financial Planner Based on Referrals Only

Recommendations may be used as a perfect source of information, especially when seeking the services of a financial planner, but they should not be the only consideration. It is important to understand that your friend’s or family member’s financial status, their financial plans, and their ability to stomach risk are all entirely different from yours. Obviously, a planner who is perfect for them may not necessarily be the best planner for you to hire.

However, it is safer to incorporate referrals as just one tool that is used in decision making. Consult the Internet or libraries for more information, verify the producer’s credentials and talk to several candidates to be sure you have selected the right planner in your case.

2. Focusing on Past Performance Older Than 12 Months

Many investors like to invest with financial planners that boast certain performance records that they have achieved in the past It is crucial to understand that the past performance of an investment is not necessarily an indication of its future performance. It could be even erroneous, especially if the above performance data is more than 12 months outdated. The market environment also varies over time, and hence, the planner who excelled in a certain economic environment may not perform equally well in the current economy or the future economy.

While assessing a financial planner, one should use yardstick based on comparison of the performance of the financial planner in the past few years consistently and during different market conditions. Most importantly, check that they have an appropriate investment thesis and a proper risk management plan that corresponds to your needs and preferences.

3. Hiring Based on Pre-existing Relationships

 This included placing individuals in positions mainly due to their previous employment history with other companies or organizations. The first type of relationship, and perhaps the most preferred, is where a worker is paired with a person they already know and may have a good relationship with, for instance, a family friend or a friend from church. Nevertheless, the fact that the two of you personally know each other should not be the primary criterion on the basis of which you are to hire a financial planner. Your money circumstances are distinct and warrant advice as well as impartiality that may be a fixed business connection can’t offer.

Think about whether the person meets the educational requirements for the field, possesses the proper experience, and can prove they dedicated time to planning their finances accurately. Ensure that they explain and listen to your financial situation, the current position, and the vision in place before giving their advice.

4. Ignoring Credentials and Qualifications

Financial planner is not just a job title; there are different types of experts in the field. We shall find a few who are extremely educated and certified while others lack some degree of education and certification at all. If a planner is dismissed based on his or her lack of professional qualifications, it will inevitably lead to some nasty surprises. The credentials or tags to look for are Certified Financial Planner, Chartered Financial Analyst, or Personal Financial Specialist. These certifications include coursework, exams, and consistent continuing education, guaranteeing the planner’s competency and adherence to professional norms.

Also, find out if the planner you are choosing acts as a fiduciary meaning that he or she is legally required to do what is best for you. This may add an additional layer of security and comfort knowing that your financial planner is dedicated to assisting you in constructing your financial targets and objectives.

5. Overlooking Fee Structures

There are different ways of receiving compensation: Commission, Fixed Fee, per Hour, or fee based on the amount of money which is managed – fee by assets (AUM). Failing to consider the fees being offered can result in hidden charges, thereby opening up the possibility of conflict of interest. For instance, a planner who receives a commission could encourage to select products that yield high commission compared to the ones that will suit the consumer.

A good rule of thumb concerning financial planners is that you should consider knowing whether they are compensated in a commission basis or any other ways before hiring them. Ask: is their compensation structure beneficial to you? And are you willing to bear the possible risks? There should be no hidden charges or extra costs, for this reason, the service provider should provide clear information regarding all the charges and costs involved.

Choosing a financial planner is not a trivial affair because the person you choose to work with can influence your financial life in the future. By avoiding such pitfalls as using contacts for referrals, relying solely on the performance of the financial year past, hiring candidates known in person, not paying much attention to credentials, and not considering the fee arrangements, you will be on the right path for hiring an ethical and competent financial expert who will help you fulfill your long-term goals. However, it doe not mean that if you research and make your decision properly you will not have a successful financial future.