Seeking Financial Advice Part 2

In Part 1, I discussed the first step before hiring a financial advisor: Dig deep and understand WHY you’re hiring them. Sounds so simple, but you would be surprised how often people choose financial advice without understanding how the industry really works. If you’re not clear about your own goals, you may find yourself wasting both time and money getting bad financial advice.

STEP 2: LEARN THE BASICS

What I’m referring to are topics such as: budgeting, cash flow, student loans, paying off debt, saving for an emergency fund, investing, saving for retirement, and insurance.

Yes, I know this seems like a lot of information. But I’m not going to let you get away with saying that it’s too difficult to learn this. You have a professional degree that required A LOT of studying. It’s not like you’re academically challenged. Sure, there’s a learning curve. But personal finance boils down to relatively simple math (my grade schooler understands the concept of compound interest) and the choices you make with your money. It won’t take four years of intense study.

There are whole sections in the bookstore and the library that can help you with these basics. There are plenty of blogs (like this one!), websites, and podcasts that go over the same exact information. Invest in yourself and your hard earned money by taking the time to learn how to use that money to build wealth, instead of falling back on faulty knowledge and bad habits that take you down the opposite path.

After pinpointing WHY you need advice, and then following this up with learning the basics on your own, you may find out that you’ve answered your own questions. You may even be able to get away with learning about the one topic that made you seek out financial advice in the first place.

You have just empowered yourself with some very valuable knowledge.

If you have children, you are also likely to pass this knowledge down to your children. How awesome is that?

A CAUTIONARY TALE

To illustrate how getting bad advice can lead to wasting both your precious time and money, let’s take the example of someone who wants some advice on whether or not they’re on track to save for retirement. Here are a couple of scenarios that can play out:

SCENARIO 1

You walk into an Advisor A’s office. Perhaps this is the same person that had previously sold you some life insurance (hopefully term life, but let’s be real….whole life policies offer MUCH better commissions and not surprisingly, they are highly recommended by many advisors). Now you’re wanting specific advice on whether you are adequately saving for retirement.

This person decides to put you in the “best” performing mutual funds. These funds had performed spectacularly in the past (past performance does not predict future returns, but this is in the fine print, and they gloss over this very important fact). They show you some nifty graphs that project a very healthy retirement account if you just stick with this advisor and their recommendations. The future looks bright indeed.

SCENARIO 2

You did some research beforehand and chose Advisor B. There is no talk of the “best” investments or the hottest funds. Instead, this advisor wants to learn about YOU. They ask you about your financial situation now and where you see yourself in 5, 10, 20 years. They talk about the importance of understanding your cash flow now and how this plays a very important role in your vision for your future.

When the subject of investing comes up, they ask you about your time horizon, risk tolerance level, and investing style. If you’re unsure about any of these topics, they will walk you through each one and discuss fully until you’re comfortable with the topic.

They certainly do not promise you outsized returns based on your investments; instead, they use more realistic projections models. They are focusing on your entire financial picture, because without all of these details, it will be very difficult to reach your goals.

Advisor A:

• No interest in client education about investing basics
• Focuses on investing only, with a lot of graphs and charts to show you that you’ll get amazing results if you work with this advisor
• Little interest in understanding how your financial goals are tied with your life goals
• More incentivized to create a plan that will increase their bottom line, with little to no discussion with you about their compensation

Advisor B:

• Promotes client education in all aspects of a financial plan
• Looks at the client in a holistic sense, understanding that investing is  just one part of someone’s entire financial picture
• Puts clients front and center in the conversation
• Compensation is transparent and does not depend on the types of investments you choose for your retirement. Their compensation is based on the value of their advice, not products, which means that there’s less conflict of interest

I hope I have made it clear at this point which advisor you would prefer. The only way you can ensure that you make the right choice is if you understand WHY you’re seeking the advice of an advisor and you do your homework beforehand so that you can spot bad advice when you see it.

HOW TO SAVE OVER $10,000 A YEAR

Otherwise, you run the risk of what happened in this scenario, titled “How Honest Financial Advisors Should Disclose Their Fees” by the blogger The College Investor.

In this post, a reader had submitted a copy of his current investments, which were made with his advisor. With his $199,000 portfolio, he was paying out $7,427.40 in commissions to his advisor (of course, he had no clue). Expense ratios associated with the mutual funds added another several thousand, meaning that the grand total cost of this portfolio was $11,004.71.

What if this person decided to make his own investment portfolio with comparable low-cost funds? The cost of a low cost index fund equivalent portfolio would have been $176.60. That’s right, you just saved yourself thousands of dollars by making up your own portfolio. Even if you factor in the advice of a good financial advisor that charged you $1,000, then you still come out way ahead.

CONCLUSION

It is stories like these that make me grateful that I did not rush into getting financial advice. Sure, I could have made more optimal choices that would have increased my net worth sooner. But that’s assuming I found a good, honest advisor. The alternative scenario of adhering to the “advice” of someone that was clearly looking out for his or her own interest over mine would have cost me dearly, all without my knowledge because you don’t know what you don’t know.

Stay tuned for the next part in this series, where I talk about how to choose a good advisor (there are definitely reasons you would choose to go this route) and the special challenges veterinarians face when looking for financial advice. You can read Part 3 here!

Have you ever found yourself in the situation where you were paying a lot of money for bad advice? Comment below!