Most people I know deal with a financial advisor. It makes total sense since we can’t be good at everything and personal finance is probably one of the most important things in your life. If your finances are not in order, you won’t be able to do what you like and financial problems often lead to high levels of stress. This is why we all look for a financial advisor to help us take care of our personal finances. As is the case with any other job, some financial advisors are awesome while others are clowns. Let’s just say that it’s harder to find a good advisor than most people expect!
We are often stuck with very few options when it’s time to find our financial advisor. We either go to the bank we do business with and pick the guy or the gal who’s available or we ask our entourage for a referral. You may have been solicited as well by people who promise that they are better than who you have right now. It might be true (if it’s me calling…lol!) but how can you really tell the difference between a professional and a clown?
The answer is easier than what you think…For each industry, there are some “secret facts” known by those who work in the field and may be ignored by others. If you want to know which car breaks down more often, don’t ask the dealership, ask a trusty mechanic. It’s the same thing in the financial industry; the professional will tell you about his secrets…
The first question you should ask your advisor is how much he earns and what pays him the most. Money drives everything, once you know how your advisor is paid, then you know how he can help you… or waste your time.
If you have money sitting in a cash or money market account and you have an outstanding debt at 6%, sound financial advice would be to use your cash to pay off your debt. Most advisors will ignore this principle since each time you withdraw money from their your account, they lose money.
I don’t believe the best financial advisor is the cheapest one. Your mortgage rate may be higher or your banking fees might be competitive but not the cheapest in town. However, if your financial advisor picks up the phone to advise you about finance without you asking for anything; this guy worth every extra penny you paid. Ask your advisor why he is more expensive – the right answer is “because I am worth it”.
A good financial advisor won’t be afraid to tell you that a part of your portfolio (or even the whole investment) is well invested even if it’s with a competitor. The point is that you ask him to be honest; if you are doing the right things he must be able to tell you.
If you didn’t know yet, one of the best secrets of the industry is that insurance policies sold are incredibly profitable for the advisor (and his firm). Ask him how profitable the insurance you purchased from him is… and wait for his answer.
I’ve ran into too many insurance agents selling insurance based on the clients’ fears. Insurance needs are real, fear isn’t. Therefore, ask for a realistic proposal with numbers that make sense for you. I once saw a permanent life policy of $300K for a client who was sitting on $1M cash in his company…. What are the odds he needs an additional 300K upon his death if the company is already full of cash?
Regardless of which firm your advisor works for, he doesn’t call all the shots. It’s better for him to be upfront and tell you that a credit department or a compliance board will have the final say in your application. It’s better if he’s transparent.
Yes, mutual funds can be seen as expensive and they are if you compare yourself to a DIY investor who picks his own ETFs. However, when we make this analogy, we don’t consider the time and passion invested by a DIY investor to manage his portfolio. If you ask any mechanic about an oil change, they will all tell you it’s stupid to pay for that since you can do it yourself. Well, when you don’t want to take care of something, you might want to pay a professional to do it for you. This is why mutual funds can be good for investors who don’t want to manage their own portfolio.
Some advisors don’t have any penalties attached to their investments or mortgages while others charge a final bill if you ever leave. This is important to know the complete structure of your personal finance and to understand if you are attached to your advisor (and his company) or not. It’s not necessarily a bad thing, but you need to know before your sign-up!
I believe personal finance is more personal than financial. Therefore, the most important thing when you deal with a financial advisor is to be able to trust him and get along with his way of working. A simple question that will tell you a lot about the guy/gal in front of you is “why do you do this job?”.
Here’s my answer:
Because I love the stock market, I love to talk about finance and love even more when I can teach finance to other people.
This will tell you if he will stay in his job or not!
Readers, do you have any good questions you would like to ask your financial advisor? What do you do before you can trust him?
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