If you do not ask a prospective financial advisor any other questions be sure to ask for his years of financial advisory experience. Your goal is to avoid inexperienced advisors and select experienced financial advisors who are real investment experts. New advisors are a major source of financial risk for five reasons.
1. Friends & Family
One of your biggest risks is a friend or family member who decides to become a financial advisor. Companies encourage new advisors to sell investment and insurance products to people they know since a relationship and a level of trust already exists. The key is for new financial advisors to take advantage of these relationships and trust so they can generate revenue that much sooner. This strategy has worked for decades because people trust their friends and family.
2. Training & Apprenticeships
I am not aware of any financial service firms that offer apprenticeships. Some firms have training that is no more than just passing securities exams. This is a sad commentary on an industry that is paid for its expertise and results. Advisors have to expand their financial knowledge on their own and this can take years. Consequently, new advisors are very dangerous – they don’t know what they are doing.
3. Chronological Age
How can the age of a financial advisor create risk? Years ago Wall Street realized most investors equate experience to chronological age. That is a 40 year-old advisor must have 10 or 15 years of experience. In the past, the big financial service firms hired new advisors out of college and developed them. But, that changed as the industry evolved from an advice culture to a sales culture. Now, when it comes to new advisors, older advisors with existing sales skills will produce more immediate revenue than younger advisors who do not possess the same sales skills. This is why your current financial advisor may have been a car salesman as recently as a few months ago.
4. Jobs Come First
The number one priority of any new financial advisor is to build a base of clients that produces the revenue he needs to keep his job. It is all about revenue. Many of the biggest firms have minimum annual revenue requirements of $250,000 or more. New advisors have a limited amount of time to produce that amount of annual revenue. Your risk is, “Who’s needs come first? Your need to achieve your financial goals or the advisor’s need to keep his job?”
5. Industry Turnover
There is an extremely high turnover rate for new advisors. It is an intensely competitive industry. Plus, in general, advisors are paid straight sales commissions and many are accountable for paying their own business expenses. After a year or two, they conclude there has to be an easier way to make a living. And, guess what? Many of them leave the industry after they have sold all they can to friends and family. They fail when they have to start selling to strangers.