6 Mistakes to Avoid When Choosing a Sustainable Financial Advisor
There are many mistakes that people often make when choosing a financial advisor. Unfortunately, it gets even trickier when trying to find a sustainable financial advisor who values putting your money somewhere climate-friendly. In this article, we’ll dive into the most common pitfalls and how you can avoid them.
By Kailani Liu and Sydney Medd
August 26, 2024
Choosing a values-aligned financial advisor is challenging due to several potential mistakes and common misconceptions about sustainable financial planning. It’s crucial to be aware of these factors, as the advisor you choose will significantly impact your financial future and your contribution to climate change.
In 2022, a study by Northwestern Mutual found that many Americans recognize the need to improve their financial planning, yet few have sought professional advice. While 62% of US adults felt that their financial planning needed improvement, only 35% had a financial advisor. Notably, three-quarters of Gen Z and Millennials acknowledged needing help with financial planning. Although only 30-40% of these younger generations sought professional help before the pandemic, they were the most likely among the generations studied to plan to engage an advisor moving forward.
In light of this trend, it’s important to understand how to avoid common mistakes and build a strong relationship with an advisor. This way, you can also benefit from a positive and productive partnership.
1. Not asking about credentials
Asking your potential future financial advisor questions about their credentials helps determine whether they are qualified to give accurate and trustworthy investment advice and guide your financial future. Asking questions about their licenses, certifications, and experience can help you see if they are a certified financial planner and verify whether or not they will act in your best interest (for example, disclosing potential conflicts of interest and choosing the most beneficial option for your financial future instead of one that may earn them more money).
2. One and done
Don’t feel like you have to commit to the first advisor you meet with! While it is tempting to sign with the first climate-conscious advisor you find, it is beneficial to speak with a few to compare personalities and approaches. This way, you can compare perspectives and ensure you’re making the best choice for your financial future.
3. Not understanding the fee structure
Expect to pay a financial advisor for their services, but be sure to understand their fee structure before signing an official engagement agreement. Just as financial services can vary from firm to firm, fees can also vary. It is crucial to understand an advisor’s payment structure to avoid surprises in the future. Financial advisors typically earn money through client fees, commissions, or a combination.
- Client fees
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- Hourly, fixed, or flat fees for time spent providing advice or for specific transactions in your account.
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- Asset-based, meaning they are calculated as a percentage of your account value and might be ongoing.
- Commissions
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- Fees based on certain transactions, like purchasing a particular security.
Different accounts may offer various ways to pay for services, such as hourly fees for advisory services, flat fees for annual portfolio reviews, commissions on securities transactions, or bundled “wrap” fees covering multiple services.
It’s essential to understand how you’ll pay for services and how your adviser gets paid, as these fees can add up and impact your investment profits. Your advisor should provide a detailed brochure and a relationship summary outlining their fees, conflicts of interest, and other important information.
4. Failing to set clear expectations
Setting clear expectations for your financial growth is essential when searching for an advisor. Be upfront with your wants and needs because financial advisors have different investing strategies. While some advisors prefer aggressive investment strategies that may involve both higher risks and higher returns, others are more conservative. Beware of red flags, like an advisor who promises a certain future return. This type of promise is not allowed. Instead, focus on long-term growth prospects. Your expectations should center on the advisor's ability to develop a comprehensive financial plan that aligns with your long-term objectives and risk profile, rather than on short-term performance metrics.
For those seeking an eco-conscious financial advisor, additional considerations are crucial. If your goal is to support climate-friendly companies and causes, you'll need to delve deeper than surface-level ESG labels. Be prepared to ask probing questions about the specific composition of investment portfolios, particularly regarding their exposure to fossil fuel companies. Many ESG funds still include such companies, so thorough due diligence is essential to ensure your investments truly align with your environmental values and expectations.
When it comes to climate, make sure you and the advisor see eye-to-eye on the difference between ESG and impact investing, and that the advisor’s strategy aligns with your values.
5. Ignoring personal connection
Regardless of the financial services an advisor can offer you, it is crucial to connect on a personal level with your choice. Taking the time to get to know one another in an honest conversation will help you build a strong and healthy relationship based on mutual respect. This will allow you to feel comfortable enough to tell them about your financial wants and needs as well as give you the confidence that they can help you reach your desired financial future. Being able to communicate and understand each other’s goals and motivations is one of the most important qualities you should keep in mind in your search.
6. Greenwashing
Often, ESG portfolios include greenwashed ESG index funds or the ESG funds themselves are not actually sustainable, even if they are marketed to be so. Knowing this, informed investors interested in working with sustainable financial advisors are more interested in solutions-based portfolios that include ethical financial offerings that are a direct reflection of their values. It is essential to find a sustainable financial advisor with the proper experience that can help put your money in places that are good for both the climate and society while they help you work towards your financial goals.
Keeping these 6 pitfalls in mind will help you find a sustainable financial advisor. By ensuring their credibility, meeting with multiple advisors, understanding the fee structure, setting clear expectations, having a personal connection, and identifying greenwashing, you can overcome the barriers of going from searching to working with a financial advisor.
Need help? GreenPortfolio has you covered. We can help with the heavy lifting of evaluating the climate commitments of potential advisors. Sign up to get matched with climate-friendly financial advisors today.
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That includes finding banking and investment partners that listen to your climate priorities. Get paired with a financial advisor who shares your values!
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