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.
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.