There is a lot of advice out there for almost anything you can think of. Want to learn how to make your own laundry soap? How about asking WebMD what that weird rash is? Because of the internet we’ve begun relying on advice a lot more than we used to. Think about the last time you wanted to make a big purchase or try a new activity. You probably searched the internet and read some advice or how-to articles. I wonder to myself why people don’t rely on the internet much for information about their financial lives.
I don’t think people are cautious enough when it comes to financial advisors. In reality, it’s all too easy to make investments look like a good deal while hiding fees or certain constraints. Financial advisement isn’t just for the rich anymore, more and more the middle class are getting in on the action. Mind you, rich people don’t necessarily have good financial advice because they’re rich but they do tend to have the quality of mistrusting people who want to help them manage their money.
As an unbiased party I’d like to talk a little bit about different types of financial advice and some red flags to look for next time you’re thinking about investing.
Two Types of Advisors
There are two main types of financial advisors. The first group are the ones who make a commission on your money. If they sell you a retirement account or help you buy life insurance they get a cut of whatever you’re investing in. The other group are advisors that charge a flat fee for their services. You pay them some amount up front and they give you advice over time. If you never invest in anything, you still pay them for the advice.
Commission-only advisors will sell you on the fact that they don’t charge you anything unless you end up investing which sounds like a great deal. After all, who wants to give away their money? It turns out that commission based investment advice tends to be problematic because there’s an incentive for the advisor to sell you financial products that make them a higher commission. It isn’t the same commission across the board, some investments like whole life insurance or 401k rollovers pay out better so you can bet the advisor is probably going to suggest those to you first.
On the other hand a flat fee advisor is going to cost you up front but if you’re planning on needing advice for the long term that’s the best route to take. The financial climate today is a lot different than it was even eight years ago. We aren’t seeing high returns on our stock market investments and high fees can eat up what small return we do see. The financial products that commission-only advisors suggest are, in general, high fee products. This isn’t a rule across the board but I can tell you that if your advisor makes commission you’re probably paying that extra money you thought you were saving on the back end.
Too Simplified or Too Good to be True
Just like in other areas of life, if an investment seems too good it probably is. For example, you might hear a pitch that says your retirement money will be protected from losses with our special investment formula. Never believe a fairytale like that. They were probably charging you enough fees to not worry about paying you the money you lost when the market went down. You probably know when you feel like you’re being sold something vs. just being given advice. If you feel like it’s a sales pitch just walk away.
Another tactic that can be used is saying one way is good for all. Everyone should be doing this it’s the best way to invest! Beware of talk like that. Our financial lives are as unique as we are and there are going to be different options for you. There isn’t one way of investing or saving that’s going to be right for everyone.
Investing is a big decision that should take some time. If a financial advisor makes it seem like you have to act now to get some great deal it’s most likely no bueno. Investment decisions should take time, just as you probably wouldn’t buy the first house you tour when shopping for real estate. The markets are always going to be there and there’s no reason to rush. You’re much more likely to get in on a bad investment if you rush it.
It’s a good idea to ask questions about what you’re investing in such as how it’ll preform when the market is in a slump. If the investment is a mutual fund you should ask about the expense ratio. Some financial products require you to commit to a payment each month for as long as you’re invested, others can be stopped whenever money is tight. Make sure you ask about how accessible your money is going to be. As a rule, I generally say if you’re going to need a chunk of money in the next five years then don’t invest it. It’ll be more important for you to have that money available in this relatively short amount of time than to risk losing it.
If You Don’t Understand it Say No Thanks
The reason we have financial advisors is to help us make decisions when investments and savings plans go beyond our knowledge base. We entrust them with our money and take it on faith that they’ll make the right call. Unfortunately they’re in the business to make money and some advisors will just make financial moves that benefit them. A red flag for me is when someone makes me feel stupid for asking questions. I ask a lot of questions when I get advice about anything. The best advisors won’t make you feel like your questions are off base.
If you’re ever offered an investment I implore you to Google it. Seriously, it’s not that difficult to sort out what investments are better than others with all the information we have today. If you can’t find good information my advice is to not get involved with it. It’s better to miss out than get stuck with a crappy investment. As always, if you have a question I encourage you to email me!