The term “Financial Advisor” has lost its credibility over the past years; it seems like everyone who works in the industry calls himself/herself a “Financial Advisor”. I often hear many myths surrounding financial advisors; I believe it’s time we bust some myths surrounding financial advisors.
Myth: All financial Advisors Are the Same
I Don’t understand why anyone would believe this myth. The fact is that there is a wide range of advisors, whose expertise differ based on education, experience, quality of service, compensation and so on. A financial advisor could be specialized in a specific area such as “high-net worth” or “tax minimization” and so on, this makes finding the “right” advisor complicated. Do not believe that all financial advisors are the same and it doesn’t matter whom you work with, find someone who you feel comfortable with and is competent.
Myth: I Have a Financial Advisor, So I Don’t Need to Know Anything About Investing
This is exactly why investors fall victim to crook advisors. No matter who your advisor is the most important thing you should do is to educate yourself! Having a good understanding of investing and the industry will enable you to ask your advisor the right questions and reduce your chances of becoming victim of a scam or the advisor’s selfishness.
Myth: Minimum Amount of Experience is Needed Before They Can Provide Financial Advice
Unfortunately this is not true. Many “advisors” are just sales people and there is no minimum work experience needed to sell financial products. The only requirement is passing the entry exam and registering with the regulatory body; as soon as the license is received they can sell financial products.
Myth: Credentials and Business Practices Must be Disclosed
You have the right to ask and find out your advisor’s accreditations, but there is no disclosure requirement. Often if the advisor is selling securities and insurance products they must disclose that, but there is no requirement for them to disclose credentials. It is up to you to ask questions and find out.
Myth: My Financial Advisor Provides Free Planning Service
If they did your planning for free, how would they stay in business? There is no such thing as a free lunch. If the advisor is not charging you any consulting fees and is doing the planning for “free”, they are earning a commission on the products they sell you. Although commissions are not necessarily evil, they do create a conflict of interest. If you are receiving “free” planning service you need to be more wary of potential conflicts and ask the though questions.
Myth: Like CA’s and CFA’s Financial Advisors Must Meet Minimum Education Requirement
No minimum education requirement exists in the industry to be a “financial advisor”.” The only thing requirement is successful passing of the exam to become licensed. Even if someone doesn’t have a high school diploma they can become a financial advisor.
Myth: Securities License Proves an Advisor is Competent
Securities license means the person was capable of passing the securities exam, that’s all. Many special programs are available that can help prepare for the exam with a few hours of studying; passing the exam has no relevance to competency.
Working in the industry I have come across some excellent financial planners and advisors as well as some highly incompetent and unethical ones. Do your homework before hiring a financial advisor.
Do you have any good/bad experiences with a financial advisor? What are some other myths you’d like to add to the list?
Ray, this is a good series you’re putting together. Because the phrase “financial advisor” is unregulated, virtually anyone doing anything with finance can use it.
Something to note about becoming licensed or registered: A passing grade on many of these tests is a 70%. That’s a pretty low standard in my book.
Also, make sure you scrutinize things they say. I had someone call me on my business phone last week to talk to me about my insurance (I know, right). He said, “I’ve been in insurance for a while and something I’ve noticed is…” When pushed, he told me that he has been in insurance for 6 months. While he wasn’t lying, he was inflating the impression of his actual experience.
What you want to find is a fee-only advisor who uses low-expense index funds to track asset classes. They should charge no more than 1.5% of assets under management as an annual fee, at the high end. Their ongoing role in your financial life should include:
1. Managing the allocation of your money among several asset classes to reduce volatility, remove uncompensated risk, and match your changing goals as your life progresses.
2. Rebalancing your funds among the asset classes as performance variations push your allocation off target, in accordance with a written investing policy.
3. Keeping your taxes and investing fees as low as possible, preferably in concert with your CPA if you use one.
4. Advocating for your net worth by showing you how and why to save money, track spending and make better decisions.
5. Advise you to carry appropriate insurance products and have up-to-date estate planning documents at all times. A true fee-only advisor makes no money from this advice, whatsoever.
Sometimes there is only one of these guys in town, if that. Their office will probably look shabbier than the rest. They almost certainly won’t own a yacht, though a few of their clients might.
None of the certifications mean jack. All they are is a handful of community-college level courses and a multiple choice test, plus some time in the industry. There is no reason that time can’t be spent screwing people out of money. Ignore the certifications and make sure they are proposing the things I listed. The only exception would be the PFS certification, which is only available to CPA’s. They will usually have a leg up on the tax side of things. Still doesn’t say anything about their investing advice, however.
I’ve worked in the industry for over 15 years (not as a financial advisor) and speak with financial advisors daily. I am shocked at how little they know about very basic investment issues. I have come across advisors who have 10+ years of experience and have no idea what an income trust is (they seem to think REITs pay dividends). Even those who are CFP often shock me with their level of knowledge.
I think myth 1 is the most dangerous. When I started investing my attitude was – well you’re the person who knows all this stuff so how can I question you. Thankfully, my thinking is a lot better now. I’ve realized I care more about my money than some stranger in an office and that helps me make wise choices about investments. Now I always learn about the investment before I invest.
Financial advisers don’t last very long in this business either. Be weary of the ones that have been with a company for only a few years or have jumped around different companies. I see a lot of people in this industry that don’t make enough money trying to push products and services on people so they jump from company to company. These companies for some reason keep offering the advisers money. Managers are even worse. It’s amazing how so many advisers and managers are really bad at their jobs.