If you’re looking for financial advice it’s not like you have to venture far and wide to find it. Friends, family, financial advisers and all manner of media are standing by ready to offer up an opinion. But here’s where the old quantity v. quality conundrum comes into play: how do you know if the advice is any good? Here are three signs you are being given good advice:
1. The downside is explained as well as the upside. Be circumspect about any advice, or adviser, that tries to sell you on something based solely on how much you could make. Before you invest a penny the most important question is: what’s my risk? Ideally you won’t even have to ask the question. The surest sign you’re dealing with someone who has your best interests at heart is if they volunteer this information. There’s nothing wrong with an investment that has risk. In fact, risk is a part of investing. Your goal is to understand the risks involved and decide if they are appropriate for you.
2. It’s personal. Good advice is tailored to your specific needs and takes into account your entire financial situation. If you are working with a financial advisor, they should be just as focused on your debts as how to invest your money, and should spend time to understand exactly what your long-term goals are before ever recommending a course of action. Same goes with advice doled out by friends and family. No matter how well intentioned it may be you should stop and ask yourself: But does it make sense for me? An uncle who is 40 years older than you may be giving advice that is appropriate for his life-stage, not yours. A friend who has a few more zeroes attached to her net worth may not be as attuned to the financial issues you are dealing with. Bad advice isn’t always nefarious; it can come from people who truly want the best for you, but that doesn’t mean they actually know what’s best.
3. There’s no incentive to sell you. Professional financial advice comes at a cost. You are receiving a service that you should gladly pay for. The issue is exactly how you pay for it. A broker or advisor who is compensated through the commissions she earns when you buy (or sell) something has an incentive to push you toward decisions that will generate that commission.
At the very least, that advisor should spell out exactly what they stand to make on an investment. For example, if you are investing in mutual funds, it is your job to make sure you understand what “share class” your advisor is putting you into. So-called “B” shares have no upfront sales load for you, but the ongoing annual fee charge—called the expense ratio-will be higher than other share classes because part of the charge goes back to your advisor to pay her for putting you into the fund. That fee is charged year in and year out; whether it’s an extra 0.25% or 0.50 percent, or even more it ends up costing you plenty. An alternative is to work with a fee-only financial advisor who charges a flat hourly fee, or annual fee—or a percentage of your assets—and thus has no incentive for you to actively trade to generate commissions. It’s also more likely that a fee-only advisor will be inclined to recommend low-cost mutual funds or exchange-traded-funds. You can learn more about fee-only advisors at the website of the National Association of Personal Financial Advisors.
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