How Financial Advice Can Be Bad For Your Wealth
As my dad always says, ‘it’s easy to be generous with someone else’s money’.
Anyone can tell you to invest with an online broker. Whether they invest in it or not is a different matter.
I once had a call from one ‘online commodities trading’ manager asking me if I wanted to make more money through a foolproof investment strategy?
When I asked him how much money he himself had put into the product he went silent and was thinking for a while.
He came back with the answer that he had put ‘lots’ into the product. When I pressed him on this he became more and more flustered and eventually hung up the phone when I asked for documentary proof that he had invested a single penny in the product.
So ask yourself, if someone does not have enough trust in an online broker they are promoting then how can you expect to?
This is why you should be wary of sites online promoting certain brokers and financial products and take control of your own finances.
My grandad was a very astute businessman whose financial success was based on his axiom:
“Be your own financial advisor”
Be your own financial advisor
Ultimately the only people who cares about you and your finances is yourself and your family.
The primary place that a member of the public will go to these days in deciding where to invest their hard earned cash is to online reviews of the financial services industry.
Many investors will be influenced by the pitch of the ‘financial professional’.
Don’t make the misguided assumption that because someone claims to be a ‘professional’ in the world of finance and that they have a fancy website with reviews that you should automatically trust it as competent and trustworthy.
Be wary of the man who urges an action in which himself incurs no risk
Bearing these words in mind, it’s quite incredible how much trust we put into financial advisors as well as guidance from websites we know little about.
I once read a true story about a man who used to sell windows. He struggled to make a living but managed to turn his fortunes around when he made the change to promoting financial products.
He said that nobody asked him questions about the brokers at all but that people had inherent trust in him because of his title and marketing skills.
He quipped that although he is more successful in promoting financial brokerage firms that he still knows more today about windows than investing!
Many sites and advice comes from people who are skilled in marketing, communication and manipulation.
Before parting with your cash to any broker, regulated or not you need to be wary of two things.
In this article
1. Understand who and what you are investing with
If you do not fully understand what you are investing in, do not invest! Some sites exploit the fact that many people don’t understand the financial product.
They will use the complexity to their advantage making the investment sound more attractive because of fancy words.
Warren Buffett of Berkshire Hathaway vowed never to invest in Bitcoin because he didn’t understand it. He had other grounds to avoid bitcoin too but this was one of his main reasons.
If that’s the advice of the world’s leading investor then you should take it too.
If you are reading a financial product review from an author or advisor, you need to know if the author has any financial incentive in giving the favourable review.
If this rating is from a trusted source such as Wall Street Journal, Forbes or FT then you can be fairly confident that the review will be genuine.
However, if the rating is from a comparison site, and the rating is particularly good, it raises the question as to whether the author has a financial incentive for the rating.
3. Clarify if the financial advisor has any of their own money invested in the product
This is the most important things to clarify.
Understand one thing. Financial advisors will often advise you to get the product that gives the most rewarding commission for themselves.
Checking how much an advisor has invested in a scheme is in fact one of the best due diligence questions that some of the world’s richest investors use this principle to apportion their multi-million dollar portfolios.
If the advisor cannot prove that they have their own funds in the scheme then the chances are that the product is poor.
Lessons to be learned
So if you want to invest your funds, ask yourself
Why is this product being promoted by the site?
Has the site owner invested their own funds in the financial product?
If you are looking for a product and someone is hard selling a particular product, be immediately on your guard.
You can mitigate the risk by doing your own scrutiny of the advisor.
As usual, you need to be your own financial advisor and check all this yourself too.
Recommendations
If you are going to invest your cash we would recommend the following:
1. Find a financial product or sevice and check ‘user generated’ reviews and ratings.
You are much more likely to find unbiased reviews and ratings from sites such as google reviews, Trustpilot and Yelp.
These have great review systems where the customer has no financial incentive to leave a good or bad review.
2. Check your product to ensure that you are covered by a compensation scheme in case of broker failure. If you already have an account at an online broker, contact you account manager and ask where you are regulated. Here you can read all about broker regulation and its impact on your funds safety.
3. If you do choose to invest with a broker recommended by a friend or broker review site check to see if they have their own funds invested there.
There are several ways of mitigating your risk. In a nutshell, check your broker, product and regulator, check the person who has recommended the broker and finally check reviews from an external source such as Google reviews or Trustpilot to ensure that any advice that you are receiving is unbiased.