woman considering who she trusts

Be Careful Who You Trust

Vetting your financial advisors

Last week I wrote a blog about the worst advice entrepreneurs receive. I spoke about being careful when looking at the source of the advice, and how to separate the good from the bad.

This week I want to talk about vetting the advice you receive about investing, particularly the people who give that advice.

Just like anything in life, there’s a lot of information out there about how to invest successfully. That advice comes in many shapes and forms, from recommendations about assets to invest in, to tips on how to manage a diverse portfolio.

Surprisingly, some of the worst advice often comes from the people who make a career out of handing it out. Financial advisors.

I’ve met some fantastic financial advisors over the years who have become good friends and trusted mentors for my investing decisions. But, I always strongly caution people to do their homework before turning to financial advisors for investing advice. You have to be careful about who you trust your money with, and make sure you know exactly what you’re getting into.

Below are some questions you should ask before working with a financial advisor. If you can’t answer these questions, it’s a good sign you should step away. 

What are their conflicts of interest?

There was a great article in the Wall Street Journal this week, about why financial advisors are never truly “conflict-free.”  

The article says: “All financial advisers — like all people who perform a service for anyone else, including journalists — have conflicts of interest. That’s true regardless of whether they work for someone else or for themselves, whether they earn fees or commissions, or whether they call themselves ‘fiduciaries’ who put clients’ interests ahead of their own.”

No matter what an advisor says, they have bias. That’s what it means to be human. We all carry our own opinions and conflicts, and you better know what your advisor’s are before you hand over your money.  

As the article points out, marketing that you are conflict-free can lull people into a false sense of security. It’s almost like saying they are “risk free” and we all know that investing is never, ever risk free (unless you’re doing it illegally).

Make sure you know how your advisor is conflicted. If they’re upfront about their biases, that’s great. But odds are, they’ll work hard to sell you on their conflict-free programs. It’s up to you to dig deeper and do the research to understand them.

But one important note: just because a financial advisor has a conflict doesn’t mean you should write them off. Like I just said, everyone has bias. The key is to do enough research that you understand the way their firm works, and be able to make informed choices when you invest.  It’s a decision only you can make, but you have to have all the information before ou do.

What is the source of their information?

When an advisor gives you tips or advice, do you know where their data is coming from? More importantly, if you asked, would you be able to understand their answer?

It’s vital that you increase your own financial literacy before approaching a financial advisor. If you don’t understand how they make their decisions or come to investing conclusions, you shouldn’t be investing.

Some advisors like to throw people off by using big financial terms, hoping they’ll get confused enough to just hand over their money, no questions asked. But if you have a base financial understanding, you can press deeper and uncover their methods. From there, you can decipher if they’re getting benefits for endorsing a specific investment, or are employed by a specific company pushing a specific investment. 

How does this work for me?

You are unique. Your goals, financial circumstances, retirement plan, and lifestyle are different from everyone else’s. One mistake most people make when working with a financial advisor is to allow themselves to be put into a “one-size-fits-all” investing plan.

Just because one investing plan works for someone, doesn’t mean it will work for you. And you shouldn’t allow anyone to talk you into investing a certain way because it worked for someone else.

Many financial advisors specialize in certain types of clients. They have a good deal of experience, and if you find one you trust who has had success, you should consider their advice. But make sure that every question you ask leads back to the main question: “How does this help me achieve my financial goals?”

The best way to do this is make sure you have your financial plan laid out before walking into a meeting with an advisor. If you know where you want to end up, you’ll be able to better steer the conversation, and ask the right questions, to set you on that path.

You’ll know you’ve found a strong advisor if they support you in your goals, and help you consider your options without pressuring you or controlling you.

You are in control

As I said several weeks ago, you have to be the quarterback of your financial team. A financial advisor should be another player there to support you, not the coach who calls the shots. Listen to your gut instinct, and if you have any doubts or concerns about an advisor, it might be time to walk away.

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