Should you use a financial advisor to invest? The answer isn’t as easy as you think…

Financial Well-being

There are a variety of things to consider when deciding on whether or not to use a financial advisor. On the surface the decision is simple: advisors can be extremely knowledgeable in the market but come with fees attached. However, there are many other factors at play in the financial advisor and client relationship, whether it be a misalignment of incentives, or the ability to steer clear of emotional decisions. Still, no matter what you decide, you should always seek professional financial advice if you are unsure of an upcoming financial decision, whether it be investing your capital, purchasing a home, or acquiring life insurance.

Financial advisor

Misalignment of Incentives

It is always in your best interest to grow your portfolio as much as possible. This makes attaining the highest returns year after year to the ultimate financial goal. Yet, while a financial advisor is looking out for your best interest, they are also looking out for what benefits themselves the most at the same time.

If your financial advisor works on commission, they may receive a better payment for directing you toward a certain financial instrument or company. This difference in commission is enough to cause a trustworthy financial advisor to recommend a product which they don’t believe in all that much or a product which they believe is similar enough to a financial instrument which may benefit you more.

Lastly, financial advisors are often tasked with hitting certain returns in order to keep their job or obtain a bonus. Depending on how an advisor is currently performing, they may deviate from your pre-determined investment strategy in order to attain their return benchmark numbers.

Speaking of Fees…

It’s a financial advisor’s job to provide you with higher returns than you could achieve on your own. However, with those higher returns also comes a fee for their services. An advisor who provides you a 3% higher return on your portfolio doesn’t look so good when they come asking for their 5% management fee at the end of the year.

Advisors have been known to insert hidden fees into a contract as a means of extracting even more payment at the end of the year. Remember, it is in an advisor’s best interest to have the highest fees they can without their clients becoming unhappy. Therefore, fees should be transparent, and advisors should be completely honest about what they are charging their clients.

One of the first questions you should ask any potential financial advisor is about their fee structure. Try to stay away from anyone who works on commission, and is, therefore, more likely to push financial products on their clients which aren’t likely to provide a significant return. Advisors who have already exceeded their return goals could pull the reigns on higher risk investments, while those who are lagging behind could begin to allocate capital to riskier financial vehicles. All the while, these actions are taken without your best interest as the client in mind.

Taking Emotions out of Investing

When it comes to investing, getting emotional can lead to bad decisions. Making an emotionally-charged, poor investment decision is something many people have gone through on their own, and is nothing to be ashamed of.

On the flipside, an advisor is someone who is impartial to the money of their clients and is less likely to make a decision based on emotional feelings. An advisor is an unbiased, third-party who is able to withstand the emotional rollercoaster of market swings and continue to push forward with the best investment strategy. It takes a lot of guts and wherewithal for an individual not to get emotionally invested in their financial decisions, but when it comes to money, let the advisor’s impartial perspective rule over your swings of personal emotions.

Utilizing Professional Knowledge

At the end of the day, as a retail investor, you likely do not have significant financial knowledge. Even if you keep up with economic news and movements in the markets, there is still not enough time in the day to truly analyze all of the important information and data to make the most informed investment decisions.

Financial advisors spend their entire day analyzing financial markets and determining the best financial decisions for their clients. Additionally, they have gone through rigorous schooling and certification processes to attain a wide breadth of financial knowledge. Utilizing a financial advisor means you will be working with someone who has all of the knowledge to provide you better financial returns than you ever would attain on your own.

For those without significant financial knowledge already, learning the ins and outs of investment vehicles and markets can be extremely time consuming and difficult. As they say, time is money, and you might be better off handing your financial decisions over to a professional while you can focus on making more money yourself.

Things to Note

If you do decide to utilize the services of a financial advisor, there are several things you can do to avoid the pitfalls of working with an advisor who may not provide you the best service possible.

Don’t Rely on Past Performance

While an advisor who has maintained positive returns for investors over time is something to consider, don’t let it be the only information you use to choose an advisor. Positive past performance doesn’t necessarily mean an advisor will maintain such performance over time. So, don’t let an advisor guarantee you they can provide the same returns they have obtained previously in the coming years, it’s a promise that most likely won’t be kept.

Make Sure it’s Personal

While you might feel proud of the money you earned and are ready to invest, it may be a minuscule amount through the eyes of a professional advisor. This is because financial professionals often deal with millions of euros per day, and do their best to prioritize clients with the largest portfolios, and therefore pay the largest fees to the advisor.

When talking to a financial professional, you should get a good sense if they care about you and the amount of capital you are ready to invest. Those advisors who only care about the big fish are likely to brush you off or give you standard responses. Make sure to find an advisor who takes your relationship seriously, no matter how much money you have, and wishes to create a personalized investment strategy just for you.

Recommendations are Key

Ask around to your family and close friends to recommend a financial advisor. Has your grandfather used the same advisor for 20 years? Maybe your best friend has an advisor who she trusts considerably. Such recommendations can be better than gold when it comes to finding the best advisor for you.

Don’t have any friends or family who use an advisor? Use independent rating sites online to get a sense of what people think of an advisor.

Each To Each Their Own

At the end of the day, everyone is different, and there is no one right or wrong choice in using a financial advisor. For those who don’t have the time or energy to learn about the financial markets and stay up-to-date, it may be best to hand the reigns over to a financial professional. But for those that have the time, and want to take control of their own finances, managing your portfolio on your own makes sense. Who knows, maybe you will even pass on some of that newfound financial knowledge to your children someday.