Ask yourself these questions to find a good investment advisor or to be your own financial planner
A lot of investment advisors have gotten a bad name lately, especially during the new rules around fiduciary duties last year. The fact is that just like any profession, there are bound to be good advisors and bad advisors.
Investing is one topic where bad advice can be life-changing. Get some bad advice on where to eat Saturday night and it’s no big deal.
Get hooked up with a bad investment advisor and you can kiss your retirement goodbye.
You may not need an investment advisor to meet your investing goals but if you do use one, you better be sure they are one of the best.
This is the 10th in our series reviewing The Intelligent Investor, the most read book on investing ever written. We’re about half way through the book and have covered some great topics from understanding your investing needs to last week’s review of ETF investing versus mutual funds.
Pick up your copy of The Intelligent Investor and follow along with the series. I’m using the 2003 edition with commentary by Jason Zweig, writer of the Wall Street Journal’s Intelligent Investor column.
While the book has focused on the individual investor to this point, chapter ten jumps in to the investor and the relationship with investment advisors. I have to make a distinction here and say that the ‘advice’ you hear on most TV shows and many websites doesn’t qualify as advice.
It’s one of the most tragic financial realities but investment advice today is almost indistinguishable from entertainment. The stuff you hear on TV accounts for some of the biggest lies told by Wall Street that lose investors’ money. It’s all designed to keep you paying trading fees and coming back for more advice.
What Graham is really talking about is the professional body of investment planners and advisors that have been trained not as stock pickers but as financial professionals.
Of course, even professional investment advisors may not have your best interest in mind. A study by the University of Chicago found widespread advisor misconduct with as many as one-in-five advisors at one firm having a disciplinary record.
I’ll first look at some of the benefits to using a financial planner or advisor and whether you really need an advisor at all. I’ll also reveal some tips you can use to find the best investment advisors if you decide to get help with your money.
Do you Need an Investment Advisor?
I love managing my own money and generally think that anyone can do it. The power of the internet has made investing your money and planning for your nest egg about as easy as surfin’ for cat pictures.
But that doesn’t mean there won’t be times when you want to find a good investment advisor to help you with a question. Whether it is a one-off question or a long-term financial relationship is up to you.
While the internet can be a great resource for some of life’s biggest questions, be careful when asking investment advice. Everyone has their own misconceptions about investing and you want to use only reputable sources.
We’ll cover some ways to be your own investment advisor later in the article but if any of the following sounds like you, then you might want to consult an advisor.
- You just can’t keep from bad investing behaviors like panic-selling and buying into hot stocks. You want to focus on long-term goals but have trouble ignoring all the short-term noise you hear about investing on TV.
- You want to meet your investing goals (duh!) but just don’t want to mess with it. You want a completely hands-off approach. If this is the case, you might also want to consider the lower-cost option of robo-advisor Betterment.
- You have absolutely no idea where to start investing and could use a little help. Clicking through a few of the pages and posts here on My Stock Market Basics will teach you everything you need to get started investing but I understand that sometimes you just want a little face-to-face help.
If you do decide to hire an investment advisor, understand the limitations of the profession and how you can best help them, help you.
- Advisors are not there to make you rich. That’s where regular saving and investing comes in. The best investment advisors are going to give you a rational plan that helps build your wealth over decades and avoids making the big investing mistakes.
- An advisor’s best tools will be helping you save money on taxes, avoid poor investing behaviors and align your portfolio with your goals and risk tolerance. Even the top Wall Street professionals can’t do much to ‘beat’ the stock market. Your advisor should understand this and not try to beat the market with complicated strategies but get the easy returns through taxes and avoiding losing money.
- You absolutely must communicate with your advisor and make sure they are investing according to your needs.
How to Find the Best Investment Advisors
I’ve always loved the quotable in Schindler’s List, “My father was fond of saying you need three things in life. A good doctor, a forgiving priest, and a clever accountant…”
To the list, it wouldn’t hurt to add a good investment advisor. The best investment advisors can take the weight of financial planning off your shoulders, letting you rest easy that you will be prepared for the future. That doesn’t mean you won’t have to do anything. You’ll still need to save money to invest but a good investment advisor will align your investments with YOUR personal needs.
There are a couple of tools you can use when looking for an investment advisor.
- The FINRA Broker Check is a database of advisors and brokers that tracks complaints, registrations and work history. It’s a good place to start to make sure your potential advisor doesn’t have skeletons in their closet.
- Advisors must be registered with your state’s securities regulators to provide service. Make sure you check to make sure they are registered and current.
- Is the advisor fee-only or commission-based? Advisors that receive a commission on your investing may be more likely to push you into trading in and out of stocks.
You can also check with professional organizations if the advisor holds any credentials like the Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA).
The first thing your investment advisor should do after you become a client is to develop a personal investment plan, also called an investor policy statement (IPS). This is so they better understand your goals and financial situation. If they try to suggest investments before doing this, they aren’t really thinking about your needs and are probably just selling you into a set of investment funds that kicks back money to them.
How to Be Your Own Financial Planner
Being your own investment advisor doesn’t mean you have to go back to school to learn everything a professional advisor does. I’ve worked in investment analysis for more than a decade and can tell you that the vast majority of investing returns are earned on a very few stock market basics…in fact, it’s the whole reason for this website.
There are just eight stock market basics you need to remember to meet your investing goals. These are simple ideas like invest according to YOUR needs and how to use diversification to lower your risk. Beyond all the investing ‘advice’ on TV, on the web or even in articles on this site, follow these eight rules and you really need nothing else.
One of the most difficult rules for many investors is to focus on saving money investing rather than picking stocks. It’s a difficult one for advisors as well because many feel the need to ‘beat’ the market to justify their expenses. Avoiding investing fees by taking a long-term approach is one of the surest ways to see your money grow steadily and meet your investing goals.
Understand that you don’t need to be ‘managing’ your investments from month-to-month, even year-to-year. Make deposits into your account monthly and buy new investments on a quarterly or semi-annually basis. Every five or ten years, evaluate your investments according to your age and investing goals. The most important decision you can make is deciding how much to have in broader asset classes like stocks, bonds, real estate and other assets.
Chapter 11 in The Intelligent Investor begins the section on security analysis within the book, outlining a general approach to finding a stock’s value. Up to this point, the book has been mainly about the bigger picture to investing. It’s in this next few chapters that we get into the real ‘how’ of picking stocks for your portfolio.
Remember, you are always in control when it comes to working with an investment advisor. The best investment advisors will ask a lot of questions and get your input before suggesting any investments. Check the fees on the investments recommended by your financial advisor and compare them against available ETFs in the market. Don’t be afraid to ask your financial planner how they are getting paid, through fees or commissions on product sales. If you feel like your advisor has other motives, it may be time to be your own advisor.