For too long, too many people have left almost all responsibility for their investment decisions to their financial advisers. It’s a bad idea. No one is going to manage your own money as well as you could. In my opinion, anything you can do to create a better life for yourself and your dependents is fair play. Thus, acquiring financial skills and reducing any over-reliance on financial advisers is part of this overarching goal.
Becoming financially literate not only strengthens you and your finances, but sets a great, much-needed example to those around you. In my opinion, “Becoming 100% financially literate” is something that deserves to be on everyone’s top life goals list.
Nothing like a free meal
Have you ever wondered how your financial advisor gets paid? You probably suspected that a financial institution is greasing his palm. Well, as the saying goes, there really is no such thing as a free lunch. Under the pinstripe suit hides the thinly disguised commission and fee structure that has rotted the financial services industry.
Even now, with highly regulated financial institutions and the onus of your financial advisor to disclose to you the commissions and fees they receive for a transaction, it can still make you uncomfortable and suspicious, and leave you with a problem. distinct bad taste in your mouth.
After the recent global financial crisis, there is a huge question mark over the validity, integrity and excessive systemic reliance on the financial services industry. Instead of being forced to put your financial interests ahead of theirs and create the best financial plan for you, financial advisers are only required by law not to sell you something that is absolutely wrong for you. That, combined with the need to make money, can sometimes mean that your best interests aren’t always at heart. As this article will show, there has never been a better time to learn financial skills and begin the process of becoming your own financial advisor.
Many financial service providers focus on either a) commissions or b) service fees. In turn, they give average financial advice and offer poor returns on investment. Commissioned “financial advisors” work for commissions paid to them by a brokerage firm, mutual fund company, insurance company, and so on. Fee-based financial advisors sell their skills and time on an hourly or pay-per-view basis.
Of the two distinct approaches, paid financial advice is virtually the lesser of two evils. However, commission services may very well be the best fit for a small investor. This is especially true in the case of a smaller investment portfolio where less active management is required. In this case, paying the occasional commission is unlikely to ruin the portfolio’s returns over the long term.
Many financial advisors are now what they call “fees” (that is, they earn their money from the fees you pay and the commissions). True paid financial planners are still a rare breed. Unfortunately, a very high percentage of financial planners do not work for you, but are primarily salespeople at financial institutions who sell financial products on commission. They will consciously or subconsciously tend to sell you a product that pays them the highest commission. So often their agenda and yours are completely different.
One Trick Product Ponies
Often times, the only product (s) a financial advisor understands is the one they are selling. An insurance agent will enthusiastically promote insurance products while your stockbroker pushes individual stocks or a basket of stocks. In either case, neither is aware of your full financial situation and is therefore unable to give you advice. The best use of your money at this time might be to reduce your debt or build up an emergency fund.
Good financial planning isn’t so much about trying to beat the market or increasing your wealth. It’s really about making sure that your portfolio is well diversified and that the other aspects of your finances – budgets, credit scores, insurance coverage, tax planning, estate planning and retirement accounts – are in the best possible shape. . Good financial planning therefore involves more than investments. It should also allow you to protect your assets, minimize your taxes, take care of your dependents, etc., while growing your wealth over time.
Your average commissioned financial advisor isn’t likely to think about the big picture. On the other hand, fee-based financial advisers are likely to be more objective in analyzing entire portfolios.
When to get professional advice
If you are going to do DIY financial planning, you will need the time, education, experience, objectivity, and the desire to achieve the same level of skill that many professionals offer. To be frank, very few average investors can become their own financial advisers. They are just not prone to this and are too busy going about their day to day life. So you need to be brutally honest with yourself about your level of financial literacy when creating and implementing your financial plans. You cannot afford to exceed your weight, make costly mistakes, and possibly suffer financial loss!
So while I think it’s a great idea to strive to become your own financial advisor, I think it’s important to stress that I also think it’s crucial to have a professional team of Grade A finance (financial / tax / legal experts) in place who you can turn to for critical advice.
There are times when you will need a more experienced second opinion than your DIY financial counseling skills may be able to do. Here are some examples of when it is useful to seek professional advice:
- When you move from one stage of life to another (getting married, having children, retiring, getting a divorce, etc.)
- Any significant financial transaction such as buying real estate, buying or selling a business, receiving an inheritance, etc.
- When you are in a financial bind or suffering from inertia and you don’t know what to do next.
- When you are looking for the best way to protect your family in the event of accident, illness or death;
- In times of enormous economic and market changes.
To acquire financial skills, you will need to familiarize yourself with the financial requirements / constraints you have and the strategies, tools and techniques you will need to achieve your goals. As you delve into the intricacies of DIY financial planning and wealth building, you’ll quickly understand why this is a full-time occupation, even for the average financial planner. The question is whether you want to become an expert or whether you prefer to hand that financial responsibility over to someone else … someone else who may or may not have your best interests fully in mind. Either way, this is a decision not to be taken lightly.