A good financial advisor can be incredibly valuable by saving you money, time and providing peace of mind.
But like any profession, not all advisors are created equal.
Let me walk you through the biggest red flags to look out for in an advisor:
1. They Try and Time the Market
Jumping in and out of the market based upon predictions is alluring.
It would be great to be able to sell an investment before markets decline and buy back in right before the comeback begins.
The problem is that there is absolutely no evidence which suggests that market timing can be done successfully. It's far more likely to negatively effect your investing outcome rather than improve it.
2. They Never Challenge You
What's the difference between an advisor and an order taker?
An order taker will do whatever you tell them to do. Whether it's buying a speculative stock your friend recommended or implementing a tax strategy that they know isn't right for you but are afraid to challenge you.
A true advisor isn't afraid to challenge you and point out some things you may not have thought about it.
3. You Never Hear from Them
One of the biggest red flags is a lack of communication.
A true advisor should proactively be contacting you several times throughout the year.
Too often I hear from people who either never hear from their advisor or only get a call around RRSP time telling them to put money in.
4. They Use Jargon that You Don't Understand
An advisor should speak in easy to understand language.
If an advisor recommends a strategy or investment, you should be able to understand what it is and why it's in your best interests.
Further, if you don't understand something, an advisor shouldn't brush off your questions. They should be willing to educate you.
5. They Push Products
Be wary if the advisor seems more interested in selling you specific financial products rather than understanding your individual financial situation and goals. They should focus on creating a customized plan for you rather than pushing investments or insurance policies.
6. They Don't Do Anything Besides Invest Your Money
Investment management is important, but only one part of the many areas a good financial advisor provides value.
An advisor should provide behavioural coaching, tax planning, risk management planning, and more.
If all your advisor does is invest your money in a mutual fund then you're likely paying fees for services you're not receiving.
7. They Recommend Individual Stocks
JP Morgan conducted a study on the Russell 3000 index, which is seeks to be a benchmark for the entire U.S. stock market.
It found that from 1980-2020 66% of stocks in the Rusell 3000 underperformed the broad index. It also found that 42% of stocks experienced negative returns.
In other words, while stock markets have given investors incredible long-term growth, this growth has been concentrated in a small subset of companies.
Buying individual stocks instead of diversified strategies puts you at serious risk of not only underperforming the index but losing money.
Only an incredibly small amount of people in history have shown the ability to successfully invest in individual stocks over long time periods.
There are always exceptions in life, but chances are that your advisor isn't Warren Buffett.
*The views and opinions expressed in this article may not necessarily reflect those of IPC Securities Corporation