10 Reasons Not to Trust Financial Advisors

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One of the most common misconceptions when it comes to investment is that you must hire a financial advisor in order to accomplish great returns. Well, we will tell you that this idea is a mere myth. This false notion has persisted for so long, thanks to financial advisory firms.

However, the reality is that individuals who manage their own investments can gain just as great or better returns than those who consult a financial advisor—and without any high fees burning a hole into their pockets.

Another major surprise for you is that your financial advisor may not have your best interest at heart. There was a report released by the Consumer Federation of America, a consumer advocacy group based in Washington, D.C. The group studied 25 major insurance companies and brokerage firms.

The report suggested while insurance companies and brokerage firms name their experts as “financial advisors,” the individuals working as professionals are just sales executives who pitch annuities, insurance products, and mutual funds.

So, if you plan to work with a financial advisor, keep in mind these 10 reasons not to trust a financial advisor. Hopefully, it will help you in deciding whether you need a financial advisor or not.

Mostly, They Are Unqualified to Do the Job

The term “financial advisor” is so often misused that it’s tough to know what financial advisors can actually do.

Hundreds of people are selling themselves as financial advisors when they have no formal education or qualification in finance management. In the United States, the constraints for financial advisory jobs vary from state to state. While some states have strict laws, others just require more than a high school diploma to work as a financial advisor.

Not to mention, there are over two hundred credentials for financial advisory. How are you supposed to know which certification your potential financial advisor should have? This can create a lot of confusion for you.

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They Are Working as Generalists

A lot of financial advisors claim they can do everything for you when it comes to managing your finances.

For instance, if you go to a financial advisor, they will tell you they specialize in currency exchange, estate planning, wealth distribution, legacy planning, cryptocurrency, risk management, stock market, compound interest, bonds, and whatnot.

The truth is that it’s practically hard for one individual to manage all these things effectively. Not only that, but some of these tasks are either too basic, redundant or something that no financial consultant should be coaching.

The Way They Make Their Money Is Questionable

Financial advisors make money in one of three ways:

  • charging an hourly rate
  • taking the percentage of the amount on your returns
  • taking the commission on the products they sell

But often, advisors combine all these payments—making money both through commission and managing your account.

This should be a massive no-no for you. Here is why.

A financial advisor can buy and sell stocks for you. If they work on commission, they could purchase or sell specific investments for you just to make a piece of commission for themselves.

Fiduciary Duty

Individuals who hold fiduciary duty are under ethical and legal obligation to work for their client’s best interest, with complete disclosure and fairness as a center point of the business rapport.

That should be obvious, right?

Except, in most situations, it isn’t. Sure, a financial advisor can convince you they have a fiduciary duty. But honestly, numbers can be manipulated to look more promising than they actually are, and investments are never guaranteed. It can be very hard for people to tell whether their hired advisor is putting their best interest as a priority.

P.S.: This book might be helpful!

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It Makes You Neglect Responsibilities

Once you hand over your accounts to someone, it is very easy to become dependent on their help. When you become dependent on your financial advisor to manage your portfolio, you basically shake your hands off from the management responsibilities yourself and never learn how to handle these things.

Not only that, but by avoiding responsibilities for your own investment, you are draining a lot of money in advisory fees. Although the charges you pay to your financial advisors may not seem like a fortune, it’s a significant amount of money you are compromising in the long term.

Even a 2% fee on your returns can wipe out a considerable amount of your future wealth.

They Over Complicate the Investment Process

Have you ever noticed people working in the financial industry often go out of their way to overcomplicate the investment process? They do it by exposing you to deadening amounts of services, products, and mediums for you to invest in.

The main idea behind this is to make you believe that you are unable to make your own investment decisions. They complicate things as much as they can, and that’s how they make a growing client base.

If you are smart, don’t fall for that! Investing should be simple. Staying consistent and forging simple investment plans is one of the most straightforward things you can do for your financial portfolio. And for that, you need a financial advisor.

They Hold the Legal Advantage

When you sign a legal contract with your financial advisor, they are the ones who draft the contents of the document. And after years of experience creating similar legal documents, they know how to prepare a contract that puts their security first and foremost.

If you are planning to hire a financial advisor, make sure to review the contents of your contract before you sign. If you take a closer look, you may discover conflicts of interest hidden between the lines.

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They Use Fear as A Tactic

A lot of financial advisors use fearmongering to get you under the wing, and it is one of the most despicable things about this industry.

It is very common for advisors to manipulate you by questioning your ability to invest without them. They basically make you fearful of discovering other options. It’s a way of keeping you under the hook, so they don’t lose a client.

The point being a fear-based rapport is never going to be healthy for your money. Making crucial decisions about your finances puts you in a very vulnerable position, and there is always someone looking to take advantage of a person’s vulnerability.

Emotions Can in the Way

Similar to fear-mongering, financial advisors can also manipulate your emotions if you are working with them for a long time. Your feelings can seriously muddy the water, especially if you have very little financial knowledge.

Honestly, business and friendship shouldn’t mix. If you form an emotional connection with a person, it seriously clouds your judgment about their financial decisions. There is no room for casualness when you are managing your money.

They Don’t Consider Financial Independence After Retirement

And our final reason as to why you should not work with a financial advisor: you need to be financially independent after you retire.

Retiring early and financial independence is concepts not known to many financial advisors. If your ambition is to reach financial independence after early retirement, hiring a financial advisor can be risky. It is likely they do not know how to get hold of your specific early retirement needs.

So, these were the reasons why you should not work with a financial advisor.

But as a takeaway, here is one reason as to why you should consider hiring a financial advisor: When you want to develop your own investment skills, so you could work independently of any financial advisor in the future. This situation is more like personal development, so there is no harm in taking the help of a professional advisor.

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