We all recognize the wisdom of avoiding any discussion of politics and religion during a family dinner. Some of us prefer to keep certain things private, while others may be more open to sharing without the required prompting. Yet whenever people get together, there’s always that one person who starts giving unsolicited financial advice and even investment advice, in a soft, muffled voice and insists on referring you to their advisor.
It’s nearly impossible to refrain from indulging in financial discussions when we’re bombarded with varied and often conflicting predictions about the outlook for our economy and stock market volatility. Worries are not too far from reason when we feel the burden of making sound financial decisions to protect and maximize our wealth potential. So, at the end of the day, a referral to a financial adviser, whether solicited or unsolicited, may not be so unreasonable, especially if it comes from someone close to you.
In fact, that’s how most people start their search for an advisor, a recommendation from an aunt, uncle, or their favorite accountant. However, should you entrust your savings to another person based on a simple suggestion?
We are inclined to trust those around the proverbial dinner table. Yet even if the experience with their financial advisor was successful, what assurance do you have that the same advisor will provide you with similar results or that your uncle has even performed significant due diligence on his advisor?
According to a survey by the National Financial Educators Council last year, mismanagement of personal finances costs an estimated 254 million adults in the United States, or a total of more than $352 billion annually. The importance of obtaining the financial intelligence needed to build wealth has never been more critical if we are to reduce our growing reliance on the country’s social and welfare programs, which is already at breaking point. The seriousness and benefits of selecting the right financial advisor for advice cannot be underestimated. Perhaps choosing a financial advisor based on “gut calls” built around a familiar recommendation and anecdotal credibility check shouldn’t replace the need for data-driven due diligence and proofs.
Choosing a financial advisor can be quite tricky, given that the United States Bureau of Labor estimates that there are more than 350,000 professionals who call themselves financial advisors in the country, not to mention another 300,000 who work for brokers and provide financial advice under a myriad of different professional terms. To compound this confusion, advisors accompany designations after their names with unfamiliar acronyms only to exacerbate the consumer’s challenge of finding clarity and familiarity.
Also, not all of the information you get about a financial advisor is accurate, current, or complete. Although the Financial Industry Regulatory Authority, a self-regulatory body, and the United States Securities and Exchange Commission are doing their part to introduce fairness and transparency, much more needs to be done. Too many bad actors are still navigating regulatory and industry loopholes to jeopardize the financial security of many vulnerable consumers.
While finding and trusting someone with your wealth can seem very daunting, in light of today’s challenges, the benefits of having the right finance team to help you plan significantly outweigh the disadvantages. According to a recent Vanguard study, working with a financial advisor can potentially boost your returns by 3% per year. So do your due diligence on advisor candidates and be smart about thinking critically through the mounds of information available in the market.
As you gather with friends and family this holiday season, share the warmth and laughter and reflect on the virtues of hard work and planning. Choosing the right financial advisor can be your most important financial decision.
Steven Park is Principal and Executive Director of Alexandria Capital LLC, based in New York. A veteran of the financial services industry for more than 30 years, he is a senior advisor and board member to start-ups, entrepreneurs and business builders.
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