Just about every investor in America has terminated relationships with one or more financial advisors. Termination is their way of acknowledging they selected the wrong financial advisor. And, every termination costs them time and money that is gone forever. So, what are the top five mistakes that investors make? This knowledge will help them avoid future mistakes.
One of the biggest mistakes investors make is letting advisors control the information they are going to rely on to make selection, retention, and termination decisions. This is a major mistake for two reasons.
- Advisors do not have mandatory disclosure requirements. They carefully choose what they are going to tell you.
- Any information that would cause you to reject a sales recommendation or terminate a relationship is automatically withheld. Why withhold information? Financial advisors can’t make any money from your assets if you knew all of the facts.
Investors put way too much emphasis on advisor personalities. They seem to think people they like will provide better investment advice than people they don’t like. It pays to remember, the best advisors are intellectual, quantitative, and analytical. They may not be buying drinks at the local tavern because they are busy helping their current clients achieve their financial goals. Many of them don’t even like the sales part of the business.
Your process should minimize the impact of advisor personalities.
3. Sales Skills
Advisors use sales skills to convince you to buy what they are selling. Their number one tactic is to tell you what you want to hear, for example, they can produce high returns for low risk. They use finely honed skills to answer your questions. They know how to make themselves sound like investment experts even when it is not true. And, they know how to appeal to your emotions when they sell investment products.
Your process should minimize the impact of advisor sales skills.
There is an old adage: Trust what you see, not what you hear. In the case of financial advisors trust what they are willing to document and disregard verbal information that is usually in the form of sales pitches. Advisors are much more likely to misrepresent or omit information if there is no written record.
Require documentation for all key information that will impact your decisions.
5. Not My Advisor
Just because you like your advisor does not mean the advisor is providing great advice and competitive returns for reasonable amounts of risk and expense. In fact, there are at least 50/50 odds that you have a weak or bad advisor. But, you may be living in denial because you do not want to face the reality of confronting your advisor and losing a friend. You would rather defer your retirement date or reduce your standard of living during your retirement years.
Your financial advisor does not have to be Bernie Madoff to damage you. Bad advice is legal. Bad investment products are legal. You are damaged, when you do not have enough assets to retire on the desired date. Or maybe you can’t afford to send your children to your alma mater. This could happen to any one.