For too long, too many people have relinquished responsibility for their investment decisions almost entirely to their financial advisors. This is a bad idea. No one will manage your own money as well as you could. From my point of view, anything you can do to create a better life for yourself and your dependents is fair game. Therefore, becoming financially literate and reducing any over-reliance on financial advisors is part of this overall goal.
Being financially literate not only empowers you and your finances, it also sets a really good and much-needed example for those around you. In my opinion, “Becoming 100% financially literate” is something that justifies being on everyone’s list of top life goals.
There is no such thing as a free lunch
Have you ever wondered how your financial advisor was paid? He probably had a suspicion that some financial institution was oiling the palm of his hand. Well, as the saying goes, there really is no such thing as a free lunch. Beneath the pinstripe suit is the thinly veiled fee and commission structure that has rotted the financial services industry to the core.
Even now, with heavily regulated financial institutions and your financial advisor’s responsibility to disclose to you the commissions and fees paid to them for a transaction, this can still make you feel uneasy and wary, and leave you with a bad taste in your mouth. your mouth.
After the recent global financial crisis, there is a big question mark over the validity, integrity and systemic overconfidence in the financial services industry. Instead of being required to put your financial interests above their own and create the best financial plan for you, financial advisors are only required by law not to sell you something that is completely inappropriate. This, combined with the need to make money, can sometimes mean that your best interests are not always at heart. As this article will show, there has never been a more appropriate time to become financially literate and embark on the process of becoming your own financial advisor.
Many financial service providers focus on a) commissions or b) service fees. In turn, they impart some regular financial advice and offer average returns on investment. Commission-based “financial advisors” are working for commissions paid to them by a brokerage firm, mutual fund company, insurance company, etc. Fee-based financial advisors are selling their skills and time by the hour or on demand.
Of the two different approaches, fee-based financial advice is the lesser of two evils, so to speak. However, on-demand services may be more suitable for a small investor. This is particularly true of a smaller investment portfolio where less active management is required. In this case, paying an occasional fee is probably not going to ruin the portfolio’s returns in the long run.
Many financial advisors are now what they call “fee-based” (meaning they earn their share of both fees paid by you and commissions). True lump sum financial planners remain a rare breed. Unfortunately, a very high percentage of financial planners do not work for you, but are essentially salespeople for financial institutions who market financial products for a commission. They will consciously or unconsciously tend to sell you a product that pays them the highest commission. So many times their agenda and yours are completely different.
One Trick Products Ponies
Often the only product a financial advisor understands is the one they are selling. An insurance agent will enthusiastically promote insurance products, while your stockbroker will promote individual shares or a basket of shares. In both cases, neither of them can be aware of your complete financial situation and, therefore, cannot provide you with advice. The best use of your money at this point might be to pay down debt or create an emergency fund.
Good financial planning is not so much about trying to beat the market or multiplying your wealth. It’s really about making sure your portfolio is well diversified and that other aspects of your finances (budgets, credit scores, insurance coverage, tax planning, estate planning, and retirement accounts) are in the best possible shape. Therefore, proper financial planning encompasses more than investments. It should also allow you to protect your assets, minimize your taxes, and take care of your dependents, etc., while building your wealth over time.
Your average fee-based financial advisor isn’t likely to think about the big financial picture. On the other hand, financial advisors who charge only fees are likely to be more objective when looking at entire portfolios.
When to get professional advice
If you’re going to do DIY financial planning, you’ll need time, education, experience, objectivity, and the inclination to achieve the same level of proficiency that many professionals offer. To be honest, very few average investors have the ability to become their own financial advisors. They just don’t have that inclination and are too busy with their daily lives. Therefore, you need to be brutally honest with yourself about how financially educated you are as you create and implement your financial plans. You can’t afford to punch above your weight, make costly mistakes, and possibly suffer a financial knockout blow!
So while I think it’s a great idea to strive to become your own financial advisor, I think it’s important to note that I also think it’s crucial to have a team of A-grade financial professionals (financial, tax, and legal experts). who you can turn to for critical advice.
There are times when you will need a more experienced second opinion than your DIY financial advice skills may be capable of. Here are just a few examples of when it is helpful to get professional advice:
- When you are moving from one stage of life to another (getting married, having children, retiring, getting divorced, etc.)
- Any major financial transaction such as buying a property, buying or selling a business, receiving an inheritance, etc.
- When you find yourself in a financial impasse or suffering from inertia and are not sure what to do next.
- When you are looking for the best way to protect your family in the event of an accident, illness or death;
- In times of great economic and market changes.
To become financially literate, you will need to gain an understanding of the financial requirements/limitations you have and the strategies, tools and techniques you will need to achieve your goals. As you delve into the intricacies of DIY financial planning and wealth building, you’ll quickly realize why it’s a full-time occupation for even the average financial planner. The question is whether you want to become an expert or whether you would rather transfer this financial responsibility to someone else…someone else who may or may not have your best interests in mind. Either way, this is a decision that should not be taken lightly.