InvestingPersonal Finance

Can You Trust Your Financial Advisor?

Can You Trust Your Financial Advisor?

It’s sad but in the financial industry, there’s often a disconnect between the advisor and the client. It’s unfortunate but true.

Investors do not always get the advice that’s best for them. Most financial advisors are held to suitability standards, which means they only have to provide their clients with “suitable” advice—not necessary the guidance that’s in the best interest of the client.

Hopefully that will change, but in the meantime, you must know whether you can trust your financial advisor or not. Making the wrong decision here can cost you thousands or hundreds of thousands of dollars throughout your life.

Here are the most important considerations when deciding whether or not you can trust your financial advisor or not.

1: Are Your Advisor’s Incentives Inline With Your Own?

Oftentimes, financial professionals’ incentives don’t map well with the investors. Investors want the best net returns but those are rarely the investment products that pay advisors the healthiest commissions.

Sadly, most folks advising others about money get paid commissions for the investment products (funds) they sell. Some funds pay high commissions to advisors and others don’t pay anything at all. Obviously, most advisors want to push the high commission funds, but those are rarely what’s in the best interest of the client.

Now not all commission paid advisors act on this incentive, but it’s impossible to deny that it exists.

You obviously want your advisor’s incentives to be in harmony with your own. If your incentives are out of sync, then it’s hard to trust the advice you’re given. For this reason, I would generally steer away from commission paid advisors and look for fee based guidance.

2: Are Your Advisor’s Fees Transparent?

If you’re like most people, you have no idea how much you’re paying your advisor or how much the funds they’ve selected are costing you.

But it’s not your fault.

For whatever reason, the financial industry tries to keep their fees as quiet and hidden as possible. It’s ridiculous and I hate it!

I guess it’s their way of keeping you in the dark while they siphon off your money.

I never talk to a client without ensuring they know exactly how much it’s going to cost them or what the expenses of a particular investment are going to be. Your advisor should do the same!

Transparency and honesty are key to being able to trust your advisor.

3: How Complicated Does Your Financial Plan Seem To Be?

Investing and personal finance don’t have to complicated, but it seems the financial industry is bent on making us think they are.

Why?

Because they stand to make massive amounts of money if we stay in the dark and feel we have to rely on their “expertise” to get us to retirement. By keeping fees, real returns, investment options, and our financial plans as opaque as possible, millions of us give up, hand over our money, and hope the “professionals” will make our financial dreams a possibility.

Any trustworthy financial advisor will cut through the complexity, ensure you know exactly what’s going on, and try to make your plan seems as simple as possible.

After meeting with your advisor, you should feel fully confident that you understand the plan and can implement it, even without their help if necessary.

4: Is Your Advisor Showing You All of Your Investment Options—Especially Index Funds?

Most financial advisers can only offer certain investments due to their lack of experience or the companies they are contracted with. More often than not, the best investments aren’t even on the table. It’s like going to a steakhouse and only being offered chicken and salad for dinner.

When discussing investment options, your advisor should openly discuss index funds, exchange traded funds, actively managed mutual funds, individual stocks and bonds, and real estate. They should describe the pros and cons of each investment in detail.

Be very leery of any financial advisor that tries to convince you that actively managed mutual funds are superior to index funds. If that’s the case, get up and walk out. It will save you thousands.

Index funds have historically far outpaced actively managed funds, and they’re a fraction of the cost.

If you want to test your advisor, let them know you’d like to use index funds as the bedrock investments in your portfolio. If they try to convince you otherwise, they don’t have your best interest at heart. Walk away!

In addition, some brokerages add an additional fee for anyone that uses index funds. If that’s the case, change brokerages. You’re not investing for them. You’re investing for you and your family.

5: Does Your Advisor Understand and Talk with You About Investments Outside of the Market Such As Real Estate?

Real estate may very well account for more millionaires than any other asset class, but very few advisors ever talk about real estate investing with their clients.

Why?

Because most advisors only get paid when they sell you funds that are traded in the typical stock and bond markets. They don’t get paid when you buy a rental property no matter how great it is for your portfolio.

They have an undeniable incentive to direct the conversation in ways that are going to lead to you buying the funds that are going to make their pockets the fattest, even if it’s not necessarily what’s best for you.

Now real estate might not be right for everyone, but I think it should at least be seriously considered by everyone. It simply offers multiple advantages that other assets just don’t provide.

Check out The Top 5 Reasons I Invest In Real Estate to see why I think everyone should consider adding real estate to their portfolio.

If you’re going to trust your financial advisor, then they better be able to openly talk to you about what’s best for you, even if it doesn’t add to their bottom line.

6: Does Your Financial Advisor Practice What They Preach?

You want to know something crazy?

49% of the mutual fund managers don’t even invest in the fund they manage.They’ll tell everyone and their dog to invest in the fund, yet they fail to do it themselves.

It’s nearly impossible to trust an advisor that tells you to do one thing, but does something completely different for themselves.

Now I know money is personal and everyone’s situation is different, but if your advisor says they believe you’re best off investing in an actively managed mutual fund when they themselves invest using index funds, then you know something isn’t right.

All the “experts” preach investing and saving for retirement, yet 46% of financial advisors don’t even have a retirement plan. They talk the talk but fail miserably to walk the walk.

Make sure your advisor practices what they preach. It’s a good indicator of how much you can trust them.

7: Does Your Advisor Have Real Experience?

There’s a big difference between wisdom and knowledge. Wisdom is gained through experience. Knowledge can be picked up in books. Most financial advisors are knowledgeable, but not all of them are wise.

When I was in college I was enrolled in a real estate investment class. On the first day of class, one of the students asked the professor if he invested in real estate for himself. After the professor said no, I got up, left, and dropped the class.

How could I learn how to invest in real estate from someone who had actually never done it before?

I’m sure he was knowledgeable. He had published plenty of articles and was well known, but he hadn’t ever experienced the real life hiccups that come with investing.

Too many folks get financial advice from from those that “know” best, even though they’ve never experienced it themselves.

Experience is a far better teacher than any book.

Sure, you want your financial advisor to be knowledgeable. But you also want them to have real life experience, not just a theoretical knowledge. It’s a lot easier to trust them when they’ve been there and done that. It’s a lot easier to trust your advisor when they are wise.

8: Does Your Advisor Focus On Your Goals?

Personal finance is just that―it’s personal! Your situation is your situation, nobody else’s. The best financial strategies and plans are specifically tailored to meet your needs. They are built to help you achieve your goals and live your values.

If you and your advisor’s discussions aren’t focused on helping you achieve your goals, then your advisor is missing the mark.

Remember, you’re paying your advisor for your benefit, not theirs. They should be giving you custom tailored advice that enables you to get to where you want to go.

A trustworthy financial advisor will focus on your goals and help you create a plan to achieve them.

Conclusion – Can You Trust Your Financial Advisor?

Picking a financial advisor you can trust is a big deal.

If you listen to an advisor that offers advice that’s “suitable” rather than what’s in your best interest, it will cost you thousands or hundreds of thousands of dollars over your lifetime.

You want an advisor you can trust—one that’s going to give you the advice that’s best for you, not one that will try and convince you to do what’s best for them.

A trustworthy advisor will ensure their incentives are inline with yours, make their fees obvious and transparent, and make your financial plan seem as simple as possible. They will understand and show you all your investment options, especially index funds and real estate. They will try and convince you to do what’s best for you. They practice what they preach, they have real life experience, and they focus on getting you to achieve your goals.

A trustworthy financial advisor will do what’s best for you even if they don’t receive a direct benefit.

As your Freedom Financial Coach I pride myself in being an unbiased and trustworthy source of financial advice. I’m here to help.

Action Steps

Make sure you get your financial advice from a trustworthy source.

Contact your Freedom Financial Coach today!

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