With a myriad of investment options available in the market, it might sometimes be tough to sieve through the junk to find those that are truly valuable to your portfolio. In a situation like this, a good financial advisor can help increase your investment returns and protect your money from possible unexpected events. However, if a financial advisor is more concerned about building his or her wealth instead of yours, these advantages can be swiftly eliminated and lead you to a lifetime of senseless payments.
According to the Breau of Labor Statistics about 176,000 people out there carry the title "financial advisor" in their name cards. Finding the right financial advisor can be like dating. Knowing what motivates a financial advisor can greatly increase your chances of identifying a good match for you.
While it is impossible to eliminate all conflicts of interests, knowing what they are and how deep they run helps you to evaluate each advice given to you.
1. I'm paid based on commission.
We all know that sales people are paid based on commission. The financial advisory pay structure is a lot like this. Financial advisors get a cut from each sale they make, and some give bigger commissions than others. For example, an annuity may pay more than a low load mutual fund, which in turn pays lower than a stock brokerage. There are some financial advisors who are paid based on fee only, this means it does not matter what product you sign up for, they get the same fee. A fee only structure better aligns the financial advisor's interest with the client's interest. Ask your financial advisor how he or she is paid.
2. Do your own homework before signing your future with us.
It does not mean that all financial advisors are inherently out to earn your money, it just means that all financial advice should be personally evaluated and properly thought through before committing. If a new product is introduced to you, do a search on the internet or ask somebody credible about the product. Knowing both pros and cons of a product and how it can fit into your financial habits will ensure you make a more prudent decision. Good financial advisors will allow time for their clients to think through before coming to a decision of their (the client's) own. This leads to the next point about hard-selling.
3. Hard-selling pays off for us.
Most clients give in if a financial advisor pushes hard enough. Many of us, myself included, tend to make the mistake of deciding straightaway in times of confusion. Not all of us are financially educated, but it sure is possible for all of us to get some basic knowledge to alleviate some of this confusion. Thus, it is sometimes necessary to step away from the financial advisor selling you the product in order to calm down and make a well-thought out decision. If a financial adviser is pushing you to make a decision in his or her presence, just make an excuse to come back to him or her. Personally, I like to use the excuse that I need to consult my wife before coming to a consensus. It works most of the time. If the financial advisor pushes further, you know something is not right.
4. When evaluating mutual funds with a load, see if there are better options.
It is easy for a financial advisor to sell a mutual fund because most of us tend to believe that we are "trusting our money with professionals". Disclaimer: I have nothing against fund managers, it is just difficult to find one who consistently outperforms the market. However, in considering a mutual fund investment, we need to take into account that a front load can easily eat into the profits we would otherwise earn if we had saved this portion and invested into a lower cost alternative. For example, if one invests $10,000 into a mutual fund with a front load of 5%, he or she would have paid $500 and only invested $9,500. Compare this to an Electronically Traded Fund (ETF) that only charges a brokerage fee of 0.25%, where you only have to pay $25.
5. I have no clue when the next recession is.
Let's put it this way, none of us know where the market is going or when the next recession is going to be. No professional course or degree program can teach you to detect the next big recession, and they should not claim to. The economy is affected by many factors and events that takes place in the world. Who can predict a natural disaster? Who can predict the next disease epidemic? At least no human can. But these events, when major enough, can impact large economies and in turn affect the world. We cannot tell when the next recession will take place, but if we are prudent enough in our decision making, we can minimize their impact on our investments.
Not all of us aspire to become financial gurus, and sometimes it might be hard to make time to get educated financially. But with a little effort and research, most of us can make wise financial decisions that brings our dream retirement one step closer.