Pitfalls to Avoid When Getting Financial Advice
Good advice isn’t something to take lightly. Listen too often to the wrong people and you can do serious damage to your retirement accounts.
It’s natural for investors to seek advice from friends and family. But those closest to you don’t always have the right answers – because they aren’t financial experts.
Those claiming to be financial advisers sometimes are not. Paid financial advisers could represent a different problem from the well-meaning advice of friends and family. If the advisers are paid through commissions by third parties to sell insurance or exotic mutual funds, they may have their own best interests at heart rather than yours.
It’s up to everyday investors to determine if their financial adviser is putting their best interests forward. In order to do so, ask the adviser how they get paid. If it’s by commission, then look for a fee-only adviser who will get paid a flat amount for work.
Parental bias can leave children in harm’s way. More young investors turn to parents for financial advice, but parents are limited by their own experiences. While the parent probably means well, emotionally charged financial advice rarely results in good decisions.
Finally, there’s the issue of risk tolerance. The parent’s taste for risk may differ from the child’s. While a young investor has decades to save – and can therefore take more risk – an older investor could be more inclined to choose a strategy that favours bonds and less volatile equities. Young investors copying that strategy could be left wanting more when they are ready to retire, and if things go wrong, it can cause conflict within the family.
Friends often share successes, but forget about the failures. Clients who are considering buying a first home and converting it into a rental property often hear from friends about the potential profits, but not the effort or risk.
More than a quarter of young investors take advice from friends. It’s often difficult to ignore someone who brags about a sweet stock pick or huge returns from an investment. But people are less likely to talk about stock picks that fail or the hard work involved on a real estate property.
