If you’re a member at a gym and go on a regular basis you’re probably familiar with the January effect. Without fail, after the 1st of the year, gyms across the country fill up with people who made New Year’s resolutions to get in shape. It’s by far the busiest time of the year (for about a month or so).
I always notice a similar uptick in the amount of people looking to get their finances in order around this time of year, as well. People seem to use the turn of the calendar as a reason to reassess their financial situation. Many of the questions I receive from a number of friends, family members or readers relate to an investment recommendation they have gotten from a broker or financial advisor. They want a second opinion to see if the investment opportunity makes sense.
The majority of the time I don’t even look at the investment option before asking a few simple questions:
Have they asked you any questions about your personal situation and circumstances? Any at all?
(I’m sad to report that most of the time I don’t even get past this first question because the answer is usually no.)
Did they explain the investment to you in a way that you can understand the potential risks and rewards?
Have they disclosed any and all fees associated with said investment opportunity?
Have they made sure that this investment is a fit for your financial plan and investment policy statement? More importantly, have they helped you create a financial plan and IPS?
Is this the first time they have contacted you in some time?
Does your advisor only contact you when trying to talk you into a new investment?
My experience has been that very few advisors are asking even elementary personal financial questions of their clients. It’s always shocking to me how many people there are out there who operate under the assumption that they have a financial advisor, when in reality they just have someone who is using them to collect fees.
What this tells me is that (a) these people aren’t getting very good advice, (b) these advisors are likely earning commissions on their investment selections or (c) far too many people are making investment decisions about their life savings without really thinking things through.
Finance people tend to argue with each other about very minor details. Will factor investing still work in the future? What’s the optimal asset allocation? What is the true definition of active investing or forecasting?
In the grand scheme of things these topics are rather trivial to the majority of people seeking financial advice. What most people need are sources of advice that will aid them in making better, more informed decisions about their personal finances using imperfect information about the future. They need someone to make them feel comfortable with their decisions and ask the right questions before putting money to work. They need someone who will have their best interests at heart.
What they don’t need is a financial salesperson who is constantly trying to get them to purchase products or change their portfolio for the sake of doing something. Too many people are investing in products they don’t understand that contain risks they probably can’t or shouldn’t be taking. And it’s not just mom and pop retail investors who are getting ripped off. It seems to be a weekly occurrence these days to read about a wealthy athlete (see here and here) who gets taken advantage of or a Ponzi scheme that costs people millions of dollars (see here and here).
You’re always going to have to take a leap of faith in some respects when taking on outside counsel about your investments or financial plan. Trust is a huge component of the advisor-client relationship. But I’m always amazed at how many people are taken advantage of with large sums of money at stake because they were far too trusting of someone who sounded like they knew what they were talking about without asking some basic questions ahead of time.
The questions I’ve listed here are by no means comprehensive. However, if you have someone advising you on your financial decisions (or making them on your behalf) and they aren’t taking your personal circumstances into account, it’s likely time to find someone else who will.
There’s no reason to pay for a service that is only benefitting the party who is receiving payment.
How to Be a Good Client