3 Pitfalls of Picking the Wrong Financial Adviser

This story originally appeared on NewRetirement.

A lot of people approach retirement by their own wits. This can be a decent way to plan – nobody knows your finances and hopes for your future as well as you do. No matter your financial expertise or lack thereof, you at least know what you want.

And, the wrong financial adviser — one without the right experience or one who does not ask the right questions — could be worse than none at all. Even noted advisers can be disastrous – do you remember Bernie Madoff?

1. There’s a Risk of Hiring an Inexperienced Adviser

Choosing a financial adviser takes some investigative research. Putting out a shingle doesn’t mean an adviser has the experience that you need for handling your retirement. And without the right experience, you might be better off managing your retirement alone.

Reputable retirement financial advisers need verifiable credentials, but not all credentials are the same, according to CNN Money’s “Ultimate Guide to Retirement.” Some are only obtained after achieving a certain level of knowledge about retirement planning.

Look for an adviser who has credentials as a certified financial planner (CFP), a personal financial specialist (PFS), or a chartered financial analyst (CFA). A retirement financial adviser who isn’t credentialed could be a terrible mistake. But one who has the right amount of knowledge and experience can help you set priorities and meet your goals.

Another factor to consider is that many financial advisers specialize in helping middle-aged people accumulate enough money for retirement, but they lack the expertise on how to best turn those resources into retirement income once you are already retired. Make sure you find someone who understands your retirement financial goals, either accumulating assets or figuring out how to draw them down.

It is critical that you choose the right financial adviser.

2. Money — Are You Paying too Much? What Is the Fee Structure?

There aren’t many ways to get around it. If you want to hire a good adviser, it will cost money.

The real trick is in figuring out how much you are paying.

Many advisers charge fees. And the better the adviser, the higher the fees are likely to be. For someone with modest income, paying out high fees for advice might not seem like a prudent decision. Fees can be in the form of hourly rates or based on a percentage of your assets.

Another way some advisers work is by commission. That might seem like a better approach, because their earnings depend on the work they do for you. Unfortunately, that’s not necessarily the case. Commission-based advisers might try to sell you on products that you don’t need. However, if there is complete transparency — the adviser informs you of their commissions — then this can be an efficient way to pay for financial advice.

The truth is that many advisers are worth their services for the money you pay. The fees can be reasonable and affordable. Plus, the work they do for you can pay off, and then some.

3. You Might Get a One-Size-Fits-All Approach for Your Unique Household

One of the biggest risks with hiring an adviser is that they won’t understand or relate to your goals and resources.

When an adviser approaches a client with canned, one-size-fits-all answers, the people who don’t fit into that mold might not get the best advice. More and more, people want to work longer instead of puttering around the house and playing golf.

And if you’re paying fees, bad advice that sends you in the wrong direction is worse than no advice.

Too many advisers are focused on savings and investments. These factors are important to every retiree, but there is more to a good retirement plan than just how much money you have. When to start Social Security, when to stop working, if you should tap home equity, what your retirement spending looks like, if can you afford health care, and more are questions that can be as important as how much are you saving and how is it invested.

Fortunately, there are plenty of advisers who understand that every client is unique. When you find the right one, that adviser will take the time to listen to your plans, understand your dreams, and set out a workable roadmap for having the life that you want.

The One Big Reason Why You Might Consider Working With a Financial Adviser

The real reason to work with a financial adviser is that few of us can afford to make a mistake with our retirement finances and plans.

During your working life, you are generally earning money and paying for things on a monthly basis. You earn money every month, you spend money every month, and hopefully save for the future. If you make a financial mistake one month, you can likely remedy it next month or year.

In retirement, you are basically taking a leap of faith that whatever money and assets you have will last you for your next 20 or 30 years — no matter your health or whatever happens in the world. That is a very big gamble to take without professional expertise.

Everyone can benefit from a retirement financial adviser. The rich and not-so-rich. It may just be a matter of finding the right one who can help you create a plan that suits the life that you dream of.

Professional financial advice goes far beyond investment decisions. A few of the decisions an adviser can help you with include:

• Identifying your goals for retirement and how to achieve them.
• How much to save.
• What types of retirement accounts to use: IRA, Roth IRA, 401(k), Solo 401(k), etc. You have a lot of options.
• Evolving insurance decisions.
• Emergency savings needs.
• Tax advice.
• Investment return goals and how to achieve those goals.
• Real estate decisions. Should you accelerate paying off your mortgage? Refinance? Should you downsize, etc.
• Estate planning.
• When to start Social Security, and if there are additional Social Security strategies to consider.

There are downsides to hiring someone who’ll step in and help you plan your retirement. But with the right financial adviser, the upsides more than make up for it.