Can I trust a financial advisor from a credit union any more than one from anywhere else, like a bank? I need to educate myself with regard to what to do with my savings and investments. But I am skeptical about trusting someone who has a vested interest in what I do. Is this a silly concern? If so, why? If not, who can I get honest advice from?
These are all good questions and I don’t think any of them are silly. Whom to trust with your financial well being is important. Money has a big impact on our lives and dealing with someone who acts in a trustworthy manner makes a significant impact on your financial future.
You mentioned being concerned about trusting someone who has a vested interest in what you do. In other words, you’re cautious, and rightly so, about trusting someone else with your money if they benefit from how you spend your money. This is a real issue and an area where it pays to be careful.
I’d like to talk a bit about two factors I think are important to consider when choosing a financial advisor. One is interest, the other is honesty.
Most of the financial advisors you are likely to encounter, whether they work for your bank, credit union, Sun Life, or another institution, have an interest in how you invest. They either make commission from selling you products or their company earns money from the products you buy which, in turn, makes them seem like better employees. Either way, these agents benefit when you buy their products.
While these financial advisors have a vested interest in your financial decisions, this doesn’t mean they are dishonest (or honest). Some financial advisors with an interest in what you purchase will be up front about you with their commissions (or quotas). They’ll explain why they are recommending their products, not pressure you to buy, and answer your questions. Honest financial advisors, even those with an interest in your investments, will take a win-win approach to working with you. In other words, they’ll recognize that, in the long run, they’ll make more money with you as a happy, long-term client than they will trying to sell you products you do not need in the short-term.
Happy clients who do well financially provide repeat business. They also refer other people to their financial advisor. A good financial advisor doesn’t need to be dishonest, their good work will keep people coming back. They know doing what is best for you usually works out best for them too.
With this said, some financial advisors with an interest in what you buy are not honest. They are focused on short-term profits, trying to sell you as many high-commission products as possible. They may use pressure tactics, appeal to your emotions, and try to get you to sign on for as many products as possible. They may not keep your business long-term, but they’ll try to get as much out of you as they can in the short-term.
The above two scenarios cover advisors with an interest in what you do, let’s focus on advisors who do not benefit, financially or directly, from your investments. Advisors who do not earn commissions or kudos from your financial accounts are sometimes called “fee only” advisors. They typically charge a one-time fee to give you advice or help you sort out your financial portfolio. This removes most incentive for them to have a conflict of interest with you.
However, while the advisor you’re talking to may not have an obvious or direct incentive to take advantage of you (ie. they don’t make commissions from you) their level of honesty is still open for examination. Maybe the advisor you are talking to has friends who work at the financial institution they are recommending. Maybe they get kick-backs from companies they encourage you to invest with. They probably do not, but they may and so it’s still important to weigh the advice of fee-only advisors.
In short, an advisor may or may not have a vested interest when it comes to your finances. This is usually easy to discover. However, what is more important, in my view, is whether your advisor is honest. All of this raises some important questions about how to determine if the advisor you’re working with is honest and has your well being at heart.
Financial advisors who are looking out for you, even if it also benefits themselves, will usually have a few common characteristics. They will:
- Answer your questions clearly.
- Not try to up-sell you. In other words, they’ll focus on products you are interested in and explain why they help you achieve your goals. They won’t start offering you products you haven’t expressed an interest in buying.
- Not use emotional manipulation. They won’t tell you sob stories about people with disabilities, they won’t ask you “How will your family get by once you’re gone?” They’ll present you with facts, graphs, and verifiable projections.
- Give you time to look over their proposals and encouraging you to take home their paperwork to review. Dishonest financial advisors will pressure you into signing quickly, before you leave their office.
- Probably come recommended by a friend or colleague who can explain why this financial advisor was a good match for them.
- Offer advice, facts, and projections you can confirm with third-parties. Talking with financially literate friends and peers, or other financial advisors, should reveal a consensus with your advisor’s advice. If your own research or the opinions of other people you talk to about your finances do not agree, then that’s a warning sign.
In short, while looking at an advisor’s interests (and how they might conflict with yours) is a good idea, I feel it is more important to find a financial advisor who wants to engage with you honestly. Ideally you can find one who wants to do win-win business with you in the long-term and who can offer clear, verifiable information without pressuring you.
To find a good financial advisor, take your time. Shop around to a few different advisors to see what they recommend. See if you can confirm the projections and advice they give you by researching on your own on-line. Talk with your friends and see if the advisor’s advice also worked for them. Don’t sign anything right away, compare plans from various banks or other firms. Finding the right financial plan is important and it’s okay if it takes you a few weeks to find the right match; it’ll save you thousands of dollars over the long-term.
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