If you are a millennial, the phrase “financial advisor” may conjure up images of some expensive-dressed man or woman who is much more interested in your money than your life. They will talk to you vaguely about diversification and compounding interest but really only care about one thing: getting paid.
But as it turns out, there’s a lot more to being a financial advisor than charging people for advice that they never followed anyway.
The first issue, as pointed out by many investors, is the inherent conflict of interest that arises between financial advisors and their clients. The second issue is the fee: do you really need to pay a fee for financial advice?
The conflict of interest
Yes, there’s a conflict of interest in most industries that affect the general population. But this is not so much of an issue with financial advice. After all, in most cases, there are no fiduciary obligations to the client. Most advisors are not required to do their best for you, and they can simply put your money into whatever investment they feel like and take whatever commission they want.
This is not to say that there are no great financial advisors or that all of them will screw you over. But it does mean that you should check their credentials and the services they provide and ask them questions.
The question of why you need to pay off a financial advisor
If you are not planning on investing in the stock market, then the services of a financial advisor are pretty much useless to you. The same goes for retirement accounts. I mean, look at this example: do you really need someone else to open up an IRA account for you? If you know where it needs to go, don’t you just go onto the website and send in your money? What good will paying off some fee do for you?
This is precisely why there is so much controversy about this form of advice. In fact, when an advisor is actually tied to an investment, he or she is probably going to recommend something other than the investment they already have a percentage of their assets in. They don’t need to make money that way.
Because financial advice seems so useless, many people think, “if it’s free, then why not?” But I’m going to put your mind at ease: there is no free lunch in the world of investing. “Free” advice is almost always a trap.
Even if you are paying for advice on personal finance, you should be mindful of who you are paying a monthly fee to and what they are selling. Not just for the sake of your finances but for your well-being as a consumer.
In summary
Financial advisors have a lot of potentials to help you, but this potential exists mostly when they are not compensated by commission. The only way to avoid paying a fee is to put your money in something like an index fund, and this requires some minimal knowledge about what that means. And if you are going to invest in some way that requires professional advice (such as with retirement accounts), you should ask why you need such expensive advice in the first place. In most cases, it’s probably just another useless middleman who will get rich off of you.