The investing world can be a truely scary place, especially for those who lack the knowledge and know-how to navigate it effectively which is why the wealth management industry has become such a revenue generator in Canada who capitalize on this misconception. Further, with the aging of baby boomers over the next decade or two and increase in the overall expected life expectancy, this will surely provide an added boost to the industry for years to come.
Luckily, knowledge of investing tools, markets and business in general are concepts that be easily obtained through the reading of a few finance books (the Intelligent Investor, Security Analysis and Wealth of Nations to name a few) and/or through reading of articles online (SeekingAlpha.com is a great website to start). With the proliferation of the Internet, there is now an endless array of infomation out there for those interested such that there should be no excuse whatsoever to not take charge of your destiny and invest in your own future.
However, many still choose to entrust their hard earned money with a financial advisor who supposedly have your best interests at heart. I won't get into my true feelings about "financial advisors" but what I will say is that advisors are incentivized to make money and make investment decisions and recommendations to people like you and I with that sole purpose in mind. Sometimes, your financial interests and goals (i.e. to build a nest egg for retirement) and theirs (to get filthy rich) are aligned, while at other times they are most definitely not. Perform a simple Google search on "Financial Advisors" and I bet you will find numerous horror stories of people who entrusted their life savings to an FA only to see their savings dwindle or vanish. Don't get me started on ponzi and/or other elaborate investment schemes with promises of a guaranteed annual return. If an advisor ever promises or strongly suggests that the past performance of a fund or investment can be repeated, you should turn and run the other way!
As with any other industry, there are always a few FA's out there that really do know what they are doing, have you best interests at heart and are looking to align there interests with yours (or at the very least - not against yours). Advisors who charge a flat monthly fee independent of AUM are a starting point. I would stay away from advisors who charge performance based fees as this type of arrangement encourages excessive risk taking on the part of the advisor.
The question every investor should be asking themselves is this: given that the advisor you choose, may or may not have your best interests at heart why would you "take a chance" on somebody when a little bit of research and reading can arm you with the necessary tools to be a successful investor? To those that ask for my advice on what to invest in, I always offer up this simple advice: if you don't have the time to manage your portfolio then invest in an indexing ETF as in doing so you would have already outperformed over 75% of the FA or asset managers out there.
Sure, there are times when investing with an advisor makes sense, these include:
1. If you work in a very demanding job such that you simply don't have the time to devote or energy to doing due diligence and research on stocks then working with a qualified and experienced advisor who works on a flat fee basis may make sense.
2. If you are highly emotional and can't trust yourself to be disciplined enough to ride the ups and downs of the market then a steady-handed advisor who has been around long enough to ride through numerous market ups-and-downs may also make sense.
However, if you do choose the FA route, do not employ the "set it and forget it" strategy but frequently (at least quarterly) re-evaluate your relationship with your FA to ensure it is working for you, that you and him/her meet at least quarterly to go through your Investment Policy Statement to ensure that your risk and return constraints have not changed since your last meeting and that you are happy with the answers you are getting.
Luckily, knowledge of investing tools, markets and business in general are concepts that be easily obtained through the reading of a few finance books (the Intelligent Investor, Security Analysis and Wealth of Nations to name a few) and/or through reading of articles online (SeekingAlpha.com is a great website to start). With the proliferation of the Internet, there is now an endless array of infomation out there for those interested such that there should be no excuse whatsoever to not take charge of your destiny and invest in your own future.
However, many still choose to entrust their hard earned money with a financial advisor who supposedly have your best interests at heart. I won't get into my true feelings about "financial advisors" but what I will say is that advisors are incentivized to make money and make investment decisions and recommendations to people like you and I with that sole purpose in mind. Sometimes, your financial interests and goals (i.e. to build a nest egg for retirement) and theirs (to get filthy rich) are aligned, while at other times they are most definitely not. Perform a simple Google search on "Financial Advisors" and I bet you will find numerous horror stories of people who entrusted their life savings to an FA only to see their savings dwindle or vanish. Don't get me started on ponzi and/or other elaborate investment schemes with promises of a guaranteed annual return. If an advisor ever promises or strongly suggests that the past performance of a fund or investment can be repeated, you should turn and run the other way!
As with any other industry, there are always a few FA's out there that really do know what they are doing, have you best interests at heart and are looking to align there interests with yours (or at the very least - not against yours). Advisors who charge a flat monthly fee independent of AUM are a starting point. I would stay away from advisors who charge performance based fees as this type of arrangement encourages excessive risk taking on the part of the advisor.
The question every investor should be asking themselves is this: given that the advisor you choose, may or may not have your best interests at heart why would you "take a chance" on somebody when a little bit of research and reading can arm you with the necessary tools to be a successful investor? To those that ask for my advice on what to invest in, I always offer up this simple advice: if you don't have the time to manage your portfolio then invest in an indexing ETF as in doing so you would have already outperformed over 75% of the FA or asset managers out there.
Sure, there are times when investing with an advisor makes sense, these include:
1. If you work in a very demanding job such that you simply don't have the time to devote or energy to doing due diligence and research on stocks then working with a qualified and experienced advisor who works on a flat fee basis may make sense.
2. If you are highly emotional and can't trust yourself to be disciplined enough to ride the ups and downs of the market then a steady-handed advisor who has been around long enough to ride through numerous market ups-and-downs may also make sense.
However, if you do choose the FA route, do not employ the "set it and forget it" strategy but frequently (at least quarterly) re-evaluate your relationship with your FA to ensure it is working for you, that you and him/her meet at least quarterly to go through your Investment Policy Statement to ensure that your risk and return constraints have not changed since your last meeting and that you are happy with the answers you are getting.
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