Crafting a Winning Investment Strategy: Financial Advisors

(Shutterstock)

What follows are the main reasons to consider getting a financial advisor to handle your investments, as opposed to managing these yourself.

Financial advisors have specific expertise that can help you navigate what can be complex financial decisions. They provide personalized advice tailored to your situation and goals. First, your advisor will want to know what you hope to achieve in financial terms. These will include how much to save and invest, how much you want to have when you retire, and so many other financial decisions from insurance and taxes to buying homes and cars and even setting aside savings for your children’s education.

The goal-setting process will take the form of a lifetime roadmap, but flexible enough to be modified for emergencies, job changes, marriage, and other unforeseen events that come up throughout our lives.

Early on, your advisor will want to assess your risk-tolerance level. Some people don’t want to worry about their principal investment losing money, and even temporary fluctuations can rattle people and cause them to lose sleep. Others, especially young people, have a lot of time for market fluctuations to straighten out, and they recognize that taking some amount of risk means their overall returns will be higher over the long run.

Knowing that a professional is handling your finances can provide peace of mind, especially during uncertain times. If you have a busy schedule, offloading the burden of planning and shifting your portfolio investments allows you to have more time for the other things that you would rather be spending your time doing.

Just as you are careful when it comes to choosing a doctor or a car mechanic, you should be careful when it comes to picking a financial advisor. We will first cover what considerations are important in choosing your financial advisor. Then we will discuss common mistakes people make. Finally, we summarize all the preparation and research you should do before entering a contract with a financial advisor.

Choosing a Financial Advisor Can Be a Major Life Decision

What qualifications should I look for in a financial advisor? Besides this article you’re currently reading, you should research other online resources relating to personal investing. One that I recommend is Empower (https://www.empower.com). Empower is a mix between a financial advisor aided by technology, and apowerful investment tool with a financial management dashboard free for anyone to use.

Your instincts matter most. The personality and impact an advisor has on you should be carefully considered. Does this person seem honest, possessing good character, easy to talk with? Ask about:

1. Education, such as a degrees in accounting, finance, economics, or business.
2. Licenses and registration.
3. Certifications, such as certified financial planner (CFP) and registered financial planner (RFP)
4. Designations and skills, including any areas of specialization.
5. Experience working in the financial industry, at least 10 years is good experience.
6. Testimonials and references from previous clients. Take time to dig into this one.

Besides the qualifying criteria above, ask about the cost! Fee-based is better than commission-based in general, as commissions incentivize the advisor to push/sell certain financial products. But fees can vary widely depending upon both the advisor and the firm within which the advisor is employed.

Six Common Mistakes People Make When Choosing a Financial Advisor

1. Hiring an advisor who is not a fiduciary. A fiduciary is defined an individual who is ethically bound to act in another person’s best interest. Fiduciary financial advisors must avoid conflicts of interest and must also disclose any potential conflicts of interest.

2. Hiring the first advisor you meet. This may be tempting because its expeditious and most advisors know how to treat potential clients and seem likable.

3. Choosing an advisor with the wrong specialty. This perhaps could be someone who primarily focuses on wealthy clients, or is in the retirement space, or is a tax guru.

4. Not asking about credentials. Financial advisors are required to pass the Series 7 and Series 65/Series 66 tests.

5. Picking an advisor with an incompatible strategy. As each advisor has their own unique strategy and approach, some tend to be too conservative or too aggressive. This is a mistake that I made and ended up agreeing to aggressive and ultimately devastatingly risky investments.

6. Not understanding how they are paid. As we discussed, some advisors are “fee only,” charging a flat rate. Others may be compensated by charging a percentage of your assets that they manage. And the one to completely avoid? Advisors that are paid commissions by mutual funds, as this creates a serious conflict of interest. This too turned out to be another mistake I made, getting sold an HSBC financial product that ultimately cratered.

Summary

A financial advisor will cost you money, but the value they can bring to a complicated part of your life will be well worth it, particularly if you haven’t been exposed to education and experience in such things as investment management, budgeting, taxes, retirement, saving for your children’s college tuition, and estate planning.

In addition, the interaction you have with your advisor will be your own personal financial education acquired over time. Your financial literacy will improve and your partnership with your advisor will result in both of you gaining understanding, codifying and pursuing an increasingly crystalized set of goals that will provide both wealth and financial independence.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.