• 08/09/2017

9 Myths About Financial Advising

9 Myths About Financial Advising

By Michelle Li

Deciding whom to entrust your money to is a major decision; and what you don’t know really can hurt you. These common myths will help you ask the right questions and choose the right advisor from the bunch.

Myth 1: Your financial adviser works for you.

Before you engage an adviser, the first thing you should inquire about is the adviser’s payment structure. Some advisers work for a financial institution that requires them to sell the company’s products and they earn commissions from each sale. When dealing with an independent financial adviser (IFA), be sure that they are representing for your best interests and not the products that yield them the highest commissions. Seek proper disclosure of compensation from advisers – they are obligated to tell you.

Myth 2: Your financial adviser has the right experience.

An adviser’s title on a name card could be misleading – so don’t just count on that. Look for credible designations, such as Certified Financial Planner (CFP), Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) or Trust and Estate Practitioner (TEP). Additionally, financial advisers must pass an entry exam and register with a regulatory body.

But be mindful that these titles do not tell the whole story. An adviser with a CFA designation can be proficient in investments, but may not know about estate planning. A CPA may have audited many companies, but may have no experience working with individual clients.

Myth 3: You should invest in the most popular product.

Your adviser may persuade you to invest in the most popular product, but this product may not be the best to help you meet your financial goals. When a product is pushed on you, it could be because the adviser receives a larger incentive for selling this one over others. It is worth looking into several options to decide the most suitable one for your budget and goals.

Myth 4: All savings products are the same.

The structures of savings products with interest are totally different from investment products with returns linked to the market. Agents and brokers often try to persuade clients into an investment-linked assurance savings (ILAS) product stressing low risk and diversification. However, not only is the “return” not guaranteed, but also reckless management and neglect of the portfolio could lead to loss of capital in the long run.

Myth 5: Frequent trades by your adviser are a good sign.

Advisers recommend transactions for three major reasons: to earn a commission, to prove that they are working hard for you or simply out of fear. If you have a discretionary portfolio managed by an adviser, the chances are that he or she is either collecting a fixed fee for looking after the well-being of your wealth or you could be giving your broker carte blanche income for his or her portfolio.

A good trade is a trade that either aims to maintain a healthy balance of your asset allocation in order to protect you from an upcoming downside or to take profit and safeguard your earnings.

Don’t forget that the more trades that are made, the more it may cost you.

Myth 6: You shouldn’t worry about product fees.

Some products have an up-front entrance fee that is high in the first few years in exchange for flexible cash out after an initial period. Other products have a rear fee or back-end fee structure in which no fee or a very small fee is charged at the beginning, but cashing out within a mandatory investment horizon will cost you a high redemption fee. The longer you commit to an investment contract, the less flexibility you will have and the more it may cost you upon unexpected exit.

Myth 7: Your adviser’s software doesn’t lie.

Fancy software can give you a clear view of a rear mirror, but won’t necessarily give you a good prediction of what the future holds for your portfolio, especially when it comes to risk profiles that might govern the future of your investments.

Risk is subjective and most of the time perceived rather than quantitative. Always question the source of a risk profile questionnaire to determine whether it is a credible one. Software gives you analytics based on historic records and it might be a good reference. However, it is more important that the company or the fund house actually hold the necessary skill sets to seek growth while having the best risk control. In the end, the adviser’s skill sets make the difference, not the software.

Myth 8: Your adviser knows best.

In order to grant full discretion to someone, you must fully trust that person. However, does your adviser deserve the level of trust to move your investments around, generate profits, cut losses, or get into high risk investments that have little or no track records? Always ask your adviser how they conduct their research and where his or her investment decisions come from.

If a company is offering centralized investment decisions for their advisers to offer to clients, ask how those decisions are derived. You’ll be surprised to know how many advisers and their companies count on yahoo.finance to conduct their research and making decisions accordingly.

Myth 9: A good adviser will guarantee returns.

Advisers are often quick to make a promise when it comes to closing a deal. Even when the adviser appears to be honest and genuine, pay close attention to whether what’s being promised is indeed being delivered. A responsible adviser will never make a guarantee to future performance, and a good adviser would also hold you equally responsible for the decisions you are a part of making. BM