The question of whether to engage a financial adviser is a difficult one to answer. Despite this, if I am asked what added value an adviser brings, the answer simply rolls off my tongue.
If your car breaks down, and you have a problem with the engine, you don’t try to fix it yourself. You hire an expert to carry out the repairs for you. If you require an operation, you don’t take a penknife to your torso and try to operate on yourself. So why would you try to handle all your finances without advice?
On the other hand, I am aware that whenever I speak to a financial adviser, I am tempted by thoughts of the ’wealth’ that I need ’managing’; but this is clever marketing. In my opinion, not all financial advisers are created equal in value, and many simply drain ’management and advisory’ fees from their clients instead of simply providing good value advice.
Thanks to many years of advisory meetings, I am fortunate enough to have built a board of advisers whom I trust. Whilst our investment philosophies may differ, I look for strong education credentials, experience and a sophisticated approach to capital markets. In other words, if I didn’t handle my finances, I would feel comfortable leaving it in the hands of a single adviser from the group.
Finding advisers of this calibre is not an easy thing however. In my experience, they are usually quite rare, and the majority are only moderately well informed and therefore of little professional value. I also prefer to keep a handle on my own investments (and avoid unnecessary fees), so I currently do not employ a financial adviser.
But should you use a financial adviser?
Whilst I personally don’t employ a financial adviser, that doesn’t mean that you shouldn’t either. A skilled professional can provide added value to your portfolio, especially in areas you lack knowledge or experience of. For example, do consider yourself an expert in tax, real estate, pensions and investment planning at the same time?
The knowledge I have gathered is not only helpful to myself, but also to other people. At one point, I even considered becoming an advisor; tempted perhaps, by the thought of a nice office, a sharp suit and long lunches with powerful clients.
I soon realised, however, that it isn’t straight forward to verify prowess. Simply looking the part will not be enough, and in many cases advisers are often also expert salespeople. Make sure you maintain awareness of this when considering hiring one.
5 issues with the financial advisory business
1. The educational and experience requirements are low.
Unlike the legal and medical professions’ 5-10 years of training prior to being eligible to practise, the requirements for financial advisers can be less rigorous. In many countries, financial advisers only have to pass a series of multiple-choice exams and score as low as 50% to pass. The result is that the person you are talking to not only has no experience, but no education in what they are advising.
2. Some advisers only work on commission.
We all know about those advisers that only get paid when they sell a particular investment or insurance product. These advisers meet with you for free, but if they don’t convince you to buy the product, they don’t get paid. A commission-only compensation scheme therefore calls into question the suitability of the advice being received.
3. Financial advisers do not need to be wealthy.
Whilst there is usually legal restrictions on bankrupts becoming financial advisers, I have never heard of a minimum wealth threshold needed for acquire the title. If your adviser is so great at what they do; why are they not taking their own advice?
4. Wealth management is as much an at as a science.
As you’ll have seen in my other articles, there is no real step-by-step process to becoming wealthy. Of course, saving more than you spend is essential. Getting the highest yield on your investments doesn’t hurt either. But for every adviser that will tell you how to do this, there will be another that will disagree.
Many subscribe to the idea that you should invest in growth stocks when you are young. These are generally considered to be stocks which will rise in value over time, as opposed to income stocks, which focus on paying out sustainable an rising dividends.
In my opinion, increasing income is something which shouldn’t have to be delayed until old age. If I die tomorrow, that 50 year pay-off will be useless to me, but by generating extra cash flow today, I increase my choices about how to live my life today.
Questions to your financial adviser
If you think you hiring a financial adviser would add value to you, the decision is your to make. I consider the following questions before making a decision;
- How does the adviser get paid?
- Are the advisers decisions better for their compensation or for my wealth?
- How many of their clients are financially independent as a result of their advice?
- What is the advisers wealth management strategy?
- Aside from industry qualifications, what expertise can you bring to managing my money?
- Have more of your clients received market beating returns than haven’t?
- Aside from being a ’market leading firm’, ’providing exceptional customer service’ and being ’returns orientated’, how do your services differ and exceed those provided by your competitors?
- Can you provide 3 or more clients willing to share their experiences of working with you?
Conclusion
Whilst it is becoming increasingly common to decry financial advisers as flashy salespeople for alternative investment and wealth coaching, I think the industry still provides good value if care is taken.
Since wealth management is as much an art as a science, it’s hard to get rock solid advice every time, but I would always err on the side of age and experience over academic qualification.
In my opinion, a good adviser should be part of your wealth strategy. The key is finding one who is right for you, and before that, you should take control of your financial future and be an expert in your own affairs. Noone will ever care about them as much as you do.