Are you uncertain about whether you can trust an advisor, or whether you even need one? Read on for some of the most common myths about financial advisors and why they are far from the truth.
Myth 1: Financial advice is only for the rich
One of the most persistent beliefs that people hold about financial advice is that it's only for people with a lot of money to spend or invest.
On the contrary, a financial advisor can help people of all income levels.
It starts with basic financial planning, which can benefit almost everybody. Your advisor will talk to you about your sources of income and where you spend money, putting together an assessment of your overall financial situation. From this analysis you'll get a clear-cut picture of your wealth and how you can grow it going forward, including advice about reducing costs, boosting your savings, or even optimizing your expenditures on big line-items like a home mortgage.
In other words, an advisor will not only help you manage what you have today, but he or she can guide your finances throughout your life.
Advisors can also be an enormous source of long-term investment growth -- but not in the way you think. Your advisor will not only help you to build a portfolio that meets your investing objectives, he or she will provide the much more valuable service of helping you stick with your investing plan.
After all, it can be too easy to let emotions take over when it comes to investing. The result is that, left to our own devices, we tend to overtrade, buy high, and sell low. The right advisor will help you manage those emotions and will respond to your worries and questions with information and advice you can understand.
Myth 2: Financial advisors are just trying to sell products
A lot of people distrust financial advice because they aren't clear on how their advisor is getting paid and whether a particular recommendation presents a conflict of interest. Unfortunately, it also means that they end up not getting help or ignoring some really good advice.
Instead of throwing the baby out with the bathwater, engage in open dialogue about how the advisor gets compensated. You have a right to know, and a good advisor will be very open about sharing this information with you and making sure you're comfortable with the arrangement.
In most cases, you'll find that advisors are paid on either a fee basis or a commission basis. Fee-based services involve a flat rate or percentage of assets under management for regular attention and trading. On the other hand, commission-based services compensate your advisor a percentage of a sale, which generally applies to investment accounts or insurance products.
Keep in mind, though that fee-based isn't always best. For example, if you have a "set it and forget it" portfolio, it might be cheaper to pay on a per-trade basis, rather than being charged an ongoing management fee.
In both cases, depending on your portfolio makeup, you might also pay expense ratios or commissions for individual mutual funds or other investments. Whether these fees apply and how much they are depend on the specific investment, which means that it's always OK to ask about them.
Alternatively, you can also find many advisors who will charge a flat rate for reviewing your portfolio allocation, helping you develop a financial plan, or advising you in other financial matters. This removes product from the equation entirely, as you are only charged in exchange for a specific service. On the other hand, you also won't get the benefit of ongoing advice in the wake of a changing economy or market.
Myth 3: Advisors are just for investments
While financial advisors do help people manage their investment accounts, they also do a whole lot more.
First off, even when it comes to investing, a great advisor will do more than allocate assets and execute trades. He or she will make sure that you feel comfortable with your investment strategy and keep you in the loop about changes in the markets, how things are going, and -- most importantly -- how you are doing. In other words, your advisor will keep the lines of communication open and help you stick with the long-term plan that's right for you.
But a good financial advisor can also help you with your everyday financial life. For example, your advisor might advise you on issues related to income taxes, estate planning, retirement income planning, or even employee benefits and debt management. These services can include the obvious, like budgeting and building savings, to the not so obvious, like developing a plan to tackle credit card debt or reducing the cost of your mortgage.
These broad services are a welcome relief for most people. After all, our financial lives are increasingly complicated. Not only can a financial advisor help bring this under control, he or she will help you to feel in control, giving you peace of mind that this important area of your life is being managed prudently for the long-term.
Myth 4: I'll have more options with a wirehouse brokerage than an independent firm
When looking for a financial advisor, your first thought might be to go to one of the major "wirehouse" firms, like Merrill Lynch or Morgan Stanley. These companies have some great people and investment options, and they're backed by an impressive array of products, research, and support services.
However, they're not your only choice.
An independent advisor can often offer you more investment options because they're not tied to one set of investment products. For example, an independent advisor can select mutual funds from several different companies, helping you choose the best ones for your portfolio.
You might also get more individual attention from a smaller firm. While there are fantastic advisors at big firms, you might find yourself feeling a bit lost in the shuffle. On the other hand, because independent advisors gain clientele based on their own merits as an advisor, rather than the brand recognition of their firm, they have an enormous incentive to treat every single client as an important one. If you prefer to have more individual attention and time from your advisor, you might find a better fit in the independent world.
Finally, while large firms also handle financial planning requests, an independent advisor might be able to spend more time with you on all the thorny little financial planning issues you might need help with. Especially if you're looking to tackle issues like credit card debt, estate planning, or budgeting, an advisor who is eager to walk you through each issue and coach you in executing your plan can be invaluable.
In the end, most people could really benefit from the guidance and advice of an experienced financial planner. Taking the time to find the right one can seem daunting at first, but by dispelling these myths and learning more about what you really need you'll soon find that the right advisor is out there.