Financial advise · Investment

How to recognize a bad financial advisor

You are looking for a financial advisor, but you are not sure who to trust? Please read the below tips about how to recognize an egocentric advisor who is not working in your best interests.

1) Don’t believe anyone who says there is no fee or who doesn’t discuss fees upfront
There are different ways advisors might charge you. A good one will lay out his / her fee structure in the beginning of the conversation. Does he or she benefit when you benefit, or when something else happens? An advisor who earns an hourly rate or a fixed percentage of your portfolio value – is better aligned with your interests than an advisor who earns commissions for selling you particular financial products. Don’t believe that they are doing something for free!

2) Only take advice from those with qualifications (and don’t drive a flashy car)
Check if they work for a regulated firm (do some background checks), not one based offshore in the Cayman Islands with a posh-sounding name.

3) Don’t accept vague answers
I know there are some complex financial products out there. Read the small letters and don’t be afraid to ask questions about the stuff you don’t understand. If your advisor just gives you a vague explanation and you feel that he / she doesn’t know much of the detail himself, please consider someone else. Only invest in things you’ve researched and that you thoroughly understand!

4) Don’t let them convince you to put more than 20% of your investments in alternative investments (gold, oil, art, metals, exclusive wine or other alternative assets)
There are various reasons an advisor might push you in this direction. Because he thinks he knows about market timings or that he can forecast macroeconomic events (even economists can’t do that). He’ll probably receive a commission for placing you in these types of investments. Although these are indeed interesting investments, just make sure you understand thoroughly what investing in alternative investments implies.

5) He / she guarantees investment performance
Markets fluctuate unpredictably. You would probably want an advisor to commit to a rate of return (we all like to have a certain amount of security). But remember, he or she just simply can’t make a promise of a specified rate of return or a promise to outperform the market.

6) It should be your decision, not the one of the financial advisor
For a lot of people, financial planning is complicated and boring. Hence, they delegate it to someone else. Please make sure you are involved in the plans which suits your timeframe, know the plans well enough so you can explain it to someone else and read the small letters. Investing don’t has to cost a lot of money and it doesn’t need to be pricier than it is.

Last but not least: if it doesn’t make sense to you, don’t do it! 

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