Does Your Advisor have Your Best Interest at Heart?

Financial Advisors have been under enormous pressure over the last year; clients are getting tired of seeing red on their statements and are looking for answers from their advisors.

The most common answers given by their advisors is “This is part of the market cycle, just stay invested and you will be fine in the long term.”

There really is nothing wrong with this answer, it’s one that I give on my blog and to readers who email me, but this may not always be the best answer. Advisors often have a vested interest in their clients staying invested. Although I agree with that, should investors take this opportunity to invest, one should question the motivation of the financial advisor behind this suggestion.

Is it because he (or she) truly believes you are doing the right thing? Or is it because his income depends on the commission your money generates? Unfortunately there is a high level of conflict of interest between the advisor’s interest and those of his/her client’s.

How can one know the difference? Before you hire a financial advisor you should conduct a good interview and ask your prospective financial advisor important questions. If you do it right then chances are you will find a trustworthy advisor.

In case you have some doubts, the following steps might help you in figuring out your advisor’s motivations.

1. When was the Last Review?

When was the last time your financial advisor reviewed your finances and portfolio WITHOUT making a new sales pitch? If the only time you hear from your advisor is when you call them or when there are “new opportunities” than I highly doubt they are truly looking out for you. Your advisor should contact you on regular bases without any new sales pitches. If you notice that every time you are contacted is when “new opportunities” arise you may want to look for new advisor or at least have a serious conversation with the current advisor.

2. Pay Attention to the Questions

Does your advisor ask questions about changes in your situation or personal goals or does he (or she) just want to know if there is any new money available? Things change, you become more conservative/aggressive, children grow up, family members get sick, etc. Does your advisor adjust your investment portfolios accordingly or does he just ask if you have more money available? Financial advisors are trained to question and dig for more money, you should pay close attention to the questions you are asked.

3. Products

What products does your advisor recommend to you on regular basis? Are these often expensive investment vehicles, such as mutual funds? Are index funds or ETFs ever recommended? If your advisor never speaks to you about low cost investments, than just ask your advisor about them. They know all about it so why do they never recommend them to you? If you are constantly offered mutual funds then you should question the motivation of your advisor and ask about alternatives.

4. Ask Tough Questions

Do not be afraid to ask the difficult questions. Ask your advisors about index funds and ETFs – ask them what they don’t like about these investment products and why they’ve not recommended them to you. Ask if they truly believe mutual funds are significantly better than index funds and if the fees charged are justified.

These are just a few things you can do to appraise your advisor, the best suggestion is to keep asking questions and keep your eyes open for any potential conflict. Financial advisor’s duties are not just to recommend investments, but also to inform and educate their clients.

What is your experience with your financial advisor? Have you ever been betrayed by them? Any good or bad examples? Share your insights please!

This is a guest article by Ray, the owner and primary author of Financial Highway, where he discusses investing, saving and practical money management concepts. You can check subscribe to his RSS feed or follow him on Twitter.

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Ethan R
3 years ago

I already got burned once by a financial advisor. It can be hard to know who to trust with your investment portfolios, especially when you’ve had bad luck in the past. Fool me once and all that.

So how do you find great recommendations for an advisor before you even get to the “ask important questions” part of the hiring process? I don’t want to waste my time again.

Should I ask family members? Colleagues? Maybe other professionals who handle other financial aspects of my life?

Ed Rempel
3 years ago

This thread is interesting in retrospect. It is from 2009, shortly after the bottom of the financial crisis when most investors sold near while the markets were down.

Both advised and non-advised investors sold their investments low, but advised investors were more likely to stay invested and more likely to buy more at great prices.

There is a huge difference between working with most investment-focused advisors vs. working with a planning-focused advisor that actually prepares a professional Financial Plan for you and gives you comprehensive planning & tax advice, in addition to investment advice.

I wrote a detailed article on this topic, quoting relevant studies (https://edrempel.com/2-things-must-focus-financially-secure/ ).

Ed

Alfie
3 years ago

Great Article. Tips mentioned here will be helpful in figuring out my advisor’s motivations.

cannon_fodder
11 years ago

I don’t have an advisor as every time I tried to work with one I never found that they truly gave me any value.

I could see that there would be times they could bring you interesting investing opportunities about which you would otherwise not know.

For the great majority of people, investing is a concept that is hard to master and thus they place a great deal of trust in people with letters after their name. The trust may not always be well placed, but without basic education of financial management, how does one know what one doesn’t know?

Extrabudget
11 years ago

For all the dutch people read extrabudget, it’s a website that help you for free.

Andray Domise
11 years ago

Kathryn wrote: How can they have my best interests at heart when they are commissioned based and need to give their own self interests priority to make a living?

I partially agree here, but the question I have to ask is – are you willing to pay for your investment advice? Advisors can either charge a commission, or go fee-for-service, and most Canadians are unaccustomed to paying either out of pocket or from fees collected on their investments. The FFS route is a difficult one for some advisors, as they need to make a living, and clients are often uncomfortable being the party who cuts the cheque.

Peter B
11 years ago

Some of you may remember these jokes but here they are again.

CEO –Chief Embezzlement Officer.
CFO — Corporate Fraud Officer.
VALUE INVESTING — The art of buying low and selling lower.
P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.
BROKER — What my financial advisor has made me.
STANDARD & POOR — Your life in a nutshell.
STOCK ANALYST — Idiot who just downgraded your stock.
FINANCIAL PLANNER — A guy whose phone has been disconnected.
MARKET CORRECTION — The day after you buy stocks.
CASH FLOW– The movement your money makes as it disappears down the toilet.
INSTITUTIONAL INVESTOR — Former investor who’s now locked up in a nuthouse.

Kristin Harad
11 years ago

One thing that can help is to Try to find a planner who is at about your same life stage so that they have a good understanding of where you are and where you want to be. For instance, I have two young children and my whole practice is geared towards new and expectant parents. I am highly tuned into the challenges that come with a growing family and can closely relate to my clients. On the other hand, I wouldn’t take on a client who is nearing retirement, since I don’t have as much insight to their goals and worries.

rocmon
11 years ago

Financial Advisor = professional guesser

I think the western society trend of hyper-processing things for instant gratification has converted the whole ‘investing’ concept into a white-color casino. A casino where people even charge you to enter the premises… set-up fees, transaction fees, admin fees, and then add insult to injury with fee fees (Taxes) if you do manage to squeak out a profit…

…think about it, do we really know what is underpinning a so called blue chip company anymore? Have we ever truly been told the facts without bias?

I can hardly believe there are so many sheep roaming this planet pretending they understand those fine print documents they sign…

Michael - The Fat Loss Authority
11 years ago

Word to the wise… you really need to be passionate about finances but still have the where with all to separate emotion from money decisions.

It’s easy to talk a big game but when it’s time to put your money where your mouth is, some people will procrastinate or stress-out under the pressure. Would love to take over all my investments but at what sacrifice?

Mike

P.S. There seems to be a real need for hourly fee planners to assist those DIY who require a shoulder to lean on when questions arise. Could be nice niche market for someone with qualifications? Just saying…