What Your Financial Advisor Doesn't Want You To Know
When it comes to investment advice, investors often find themselves being overwhelmed by information, not knowing which sources to follow.
Let’s face it, whether it be investment advice or any other service, there will always be the good, the bad and the ugly.
While the latest financial crisis has weeded out a fair number of the latter two varieties, there are unfortunately still too many questionable types remaining in the game. However, with the help of the internet and social media, finding a suitable investment advisor -- and eventually communicating with them -- has never been easier.
The buildup to the financial crisis left individual investors starving for more transparency from their investment advisors. As a result, this relatively recent push towards increased transparency has sparked a wave towards full-on, transparency on part of those advisors willing to listen to the individual investor.
Here are six things your old-school financial advisor doesn’t want you to know. Use this list in your search for a more transparent and independent thinking advisor:
1. Independent Thinking Matters
The more an investment advisor is linked to a larger financial group, the more likely laziness will kick in and they will pitch you ideas generated by the firm, rather than their own ideas.
As a result, you end up with a generic investment portfolio rather than one really suited for your level of risk aversion and investment goals. Certain ideas from the firm may also provide them a more lucrative cut, discouraging independent thinking.
2. Stocks Don't Always Go Up Over The Longer-Term
It’s basically cooked into our mentality that if you buy and hold a stock, it will be up in the long run. This is a common pitch from a mediocre financial advisor, too. The reality is that this line of thought is far from the truth. Just look at the past ten years where the markets essentially stayed flat, i.e. a lost decade.
You’re best to stay away from an investment advisor who subscribes primarily to a “buy – hold – forget” theory. This is another by-product of laziness.
There still are plenty of buy/hold/forget scenarios, but in today’s market, there needs to be a pretty strong case -- and you can pretty much wipe away the “forget” part of the theory. There’s no such thing as “forgetting” about a financial investment and expecting it to do well.
If you’re really looking for a buy/hold/forget strategy, you might be more suited for investing in baseball cards, old coins and anything else you’ll find on "Antiques Roadshow”. And not even those people walk out winners all the time.
3. Timing Matters
An old-school investment advisor loves to repeat the old adage, "don’t try to time the market." Sure, picking exact tops and bottoms in the market is something you shouldn’t be trying to nail -- but the general swings in the markets are not too difficult to get right, especially if your job is to keep an eye on them with a microscope. Finding a good investment, even for the long-term, still relies on timing.
4. Stocks Are Highly Correlated
Markets tend to operate in an either risk-on or risk-off mode. Thus most stocks tend to rise and drop together. Don’t fall for investment advisors with promises of wizard-like stock-picking abilities. You don’t need (or want) someone picking the next big shocker. Anyone trying to do that with your money is gambling way too much. At that point, you might as well pick stocks yourself.
Find someone who understands how to track the pendulum of the market. Many stocks, businesses and sectors are correlated -- and that provides a not-so-risky way to find some attractive opportunities.
5. They're Better At Sales Than Investing
Many investment advisors are not real students of the markets at all, but rather salesmen with a clear mandate to generate commission. Just like anything, if you can tell how someone is incentivized then you can tell where their focus is going to be. For many financial advisors, the number of clients they have will have the largest impact on their income.
You want to find an advisor who has an “eat what you kill” mentality. Yes, it’s near impossible to find an advisor who doesn’t make more money when they increase their clientele, but see if you can find someone who is more incentivized by commissions on returns rather than the number of clients. Otherwise you may find your advisor spending more time doing marketing and sales, than tweaking your portfolio.
6. Certain Packages Provide Higher Margins
Certain financial packages provide higher margins to the financial advisor than others. If the firm they work for is heavily pushing a certain financial package, they oftentimes will provide a higher commission to financial advisors who sell it (going back to point 5).
Additionally, the firm they work for may only allow in-house developed products to be sold. If this is the case, you are limiting yourself to only a couple of investment opportunities -- and automatically eliminating your freedom of choice from the entire market.
Your best bet is to find a transparent advisor who can choose any stock, fund, bond or other security in the market.
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