There’s a lot to be said for a personal recommendation: Letting your neighbors vet a plumber can save you a trip into the sinkhole that is internet reviews.
It helps, though, that a plumber doesn’t ask your toilet about its hopes and dreams before dismantling it to find the leak.
Financial advice is a different story. And yet, when seeking that advice, you may be tempted to blindly turn to your parents’ — or another relative’s — longtime financial adviser.
Is that always a mistake? No. But it’s also not a given that your parents’ adviser is a good fit for you and your finances.
It’s wise to look beyond those relationships and do your own due diligence.
Dig into fees and conflicts of interest
The idea that financial advisers should always act in the best interest of clients has been in the news lately. The Department of Labor proposed a regulation known as the “fiduciary rule” requiring just that. The effort appears dead, but it leaves at least a small legacy: More people know to press advisers about how they make their money. Ten or 20 years ago, your parents may not have.
“My parents had a financial adviser, and when I was starting off in my career, I quickly realized she was incentivized to sell investment products instead of giving holistic advice that would benefit me,” says Charles Ho, a certified financial planner and founder of Legacy Builders Financial in Folsom, Calif. “Unfortunately, this is more the rule than the exception.”
You should approach any advisers — whether they have a relationship with your parents or not — with two questions: “Are you fee-only?” and “Are you a fiduciary?”
“Fee-only” means the adviser is paid by you directly, and only by you; he or she is not paid commissions to offer certain financial products. (Some advisers call themselves “fee-based,” which generally means they are paid commissions alongside a fee from you.) Fee-only advisers are typically fiduciaries, which means they must have your best interests in mind when recommending investments.
“Many people may call themselves a fiduciary, but if you really want to make sure they are, get it in writing,” Ho advises.
Do a compatibility check
Your parents may love their financial adviser, but that doesn’t mean you will. Chemistry is key in this relationship. You want an adviser who can relate to your life stage and financial situation.
“Advisers typically grow along with their client base, living similar lives to their clients’ — they can relate and empathize to their life experiences as they are going through them,” says Marcel Winger, a certified financial planner and founder of Mutual Wealth in Austin, Texas.
If that kind of empathy isn’t there, you may hesitate to bare your finances.
Honesty is fundamental in an adviser-client relationship: If you leave out key details, you’ll sell yourself, your finances and the adviser short.
Some people struggle with that level of transparency no matter what; when an adviser spans the family, it can be even more difficult.
Consider new alternatives
Gone are the days when you needed a six-figure bank account to get access to investment advice. While many financial advisers still focus exclusively on high net worth clients, investors with fewer assets have more options than ever:
Fee-only financial planners: You can find advisers who charge by the hour or by the plan through adviser associations like the Garrett Planning Network and XY Planning Network. Because they charge a flat fee rather than a percentage of the assets they manage, they have less incentive to serve only clients with large account balances.
Robo-advisers: These are digital investment management services. They often have low or no investment minimums, so you can get started with a modest amount. And they can cost significantly less than a human adviser — you might pay a robo-adviser 0.25 percent of your balance, while a typical financial adviser who charges a percentage of your assets will cost 1 percent or more.
Robo-advisers are a particularly good option for investors who don’t have complicated financial situations and don’t need or want a lot of hand-holding. (Many offer access to human financial advisers to answer questions.)
You might consider using a robo-adviser to get started with investing now, then evaluate whether working with a human adviser is a better fit later, as your financial life becomes more complex.
Arielle O’Shea is a writer at NerdWallet. E-mail: firstname.lastname@example.org. Twitter: @arioshea.