How Does Your Financial Adviser Make Money?

The most common question from people who want to buy retirement products is how to find a good financial adviser who can provide an unbiased advice. It is important to avid impulse decisions and double check the short term and long term returns on investment. Stakes are higher when it comes to financial advice.

According to the results of the research from Economic Policy Institute, undisclosed conflicts of interests has cost savers an estimated $17 million annually because people unwittingly bought retirement products from a financial planner who is paid commission. The financial planner is incentivized to recommend the more expensive retirement product even if it is risky.

Because of the prevalence of ethically conflicted financial advice, the Department of Labour under former President Barack Obama introduced the fiduciary rule that requires financial planners to provide advice according to the best interests of their clients. However, after the March 15 court ruling, fiduciary rule will no longer be enforced.

How will you find a good financial adviser?

Do not be in awe of legitimate sounding titles because they are meaningless. Financial adviser and financial consultant are generic while financial planners do not mean anything. Look at their educational requirements because the certified financial planners and registered investment advisers usually have a bachelor degree from a college or university and have completed 3 years of full-time financial planning or an equivalent part time experience.

Understand what incentivizes the financial planner. Does he charge a flat rate for the advice or does he earn a commission? If the financial planner is receiving commission, it is very likely that he will recommend certain products more than others because of the incentive. To know how the financial planner is compensated, ask for the upfront fee agreement in writing.

In addition to asking how to find a good financial adviser, it is important to check the individual’s employment record as well as the list of complaints made against him. One of the signs that there is trouble is when the financial pro does make the effort to sit down with you and discuss goals. He often makes big promises about future investment returns.

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