Posted on Mar 20, 2013

You know what they say: You cant choose your family, but you can choose your financial planner.

Or something like that.

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The choice isnt always an easy one. How will you know that your planner is reputable and trustworthy? Perhaps more importantly how will you know when she isnt ?

These five red flags are a good indication of whether the financial planner sitting across from you is someone you should trust with your money.

1. She Isnt Certified

There are a lot of good planners out there who arent certified financial planners, says Samantha Vient, CFP®, of LearnVest Planning Services. But the certification is becoming the industry gold standard, partially because CFPs® are required to adhere to the CFP® Board’s standards of professional conduct, which basically means we must put clients’ interests ahead of our own in all circumstances.

Its always a good idea to work with someone who has the CFP® designation, which is issued after completing a CFP® Board-approved personal financial planning curriculum, passing a rigorous exam issued by the Certified Financial Planner Board  of Standards. meeting experience requirements and passing an ethics and background check.

2. He Offers to Manage Your Money for Free

Financial planners are usually paid in one of two ways: Either through upfront fees, which can be hourly, retainer or a percentage of the assets they manage for you, or through commission, which means the planner is paid each time he buys or sells an investment.

Fee-only payment structures are more desirable for most clients, as theres no financial incentive (commission) for a planner to buy or sell, whereas working on commission encourages planners to make trades, rather than solely look out for your best interest—called a fiduciary duty. (You want to be sure that the planner you choose is a fiduciary.)

Sometimes commission-based brokers can represent their planning as being free of charge: Nothing is ever free, warns Vient. You’ll likely be paying through fees and commissions on the investments they choose.

LearnVest Planning Services also provides the services of fee-only certified financial planners. To see if theyre right for you, start with a free, 15-minute financial checkup .

 3. She Says She Outperforms the Market

If a financial planner tells you that she can outperform the market, thats a major red flag, Vient explains. In fact, due to government regulations, its illegal to advertise statements that promise a specific return.

Outperforming the market—that is, getting better investment returns than the market average—is extremely difficult to do consistently, and requires taking a lot of risks with your investments. While some fund managers (paging Warren Buffett) have an aptitude for consistently outperforming the market, its a rare planner who can do the same—and results are never guaranteed. Either way, in the pursuit of these high returns, shell be exposing your investments to higher risk.

Instead, look for an advisor who, when looking at your portfolio, can advise on proper asset allocation based on your risk tolerance and time horizon, as well as through economic ups and downs.