Financial Advice: Who To Ask & Why
If I wanted some bricks laying, I would ask a brick layer. For plumbing, I would ask a plumber.
If I wanted some care, I may ask a carer and for cleaning I might ask a cleaner.
If I were taking a trip, I may well consult Trip Advisor.
However, if I wanted some financial advice, the last person on Earth I would ask is a ‘Financial Advisor’.
Huh?
My Counter-Intuitive Advice About Financial Advisors
Maybe it’s just me, and I’m certainly not saying there aren’t any decent Financial Advisors out there.
I just haven’t found any.
… and I mean not even close.
In addition to this, if someone has the title ‘Independent Financial Advisor’ (IFA) I don’t believe they are independent at all. Very often, IFAs have a limited range of investments they can or will advise you on. They often don’t cover the entire market.
In addition II, the advice you’re going to get from a Financial Advisor, ‘Independent’ or not, is almost certainly not going to cover every asset class.
One of the safest and most proven ways of making money is investing in property but Financial Advisors generally don’t tend to advise on property investment (unless via funds).
Now property is hardly an ‘alternative investment’ but it is to an IFA.
Excepting property, this is where it can start to get a little hairy, which I’m going to talk about more below under the subject of Alternative Investments. There are plenty of other areas that a Financial Advisor simply wouldn’t go near (often with good reason) under this broad heading. This is mainly due to risk and market knowledge, a Financial Advisor simply doesn’t have the time or the experience to truly cover the whole market and from a risk perspective they will generally avoid all alternative investments.
In general, it’s good to be cynical when investing your hard-earned cash. Do your due diligence, research and research some more if you are going to take advice from anyone and make sure you know inside out who you are taking advice from and if in doubt verify that advice by checking elsewhere (and you can read a little more about how to make a good investment here: Making Investments: 9 Important Questions to Ask When Making An Investment).
So if I did come across a Financial Advisor who advised me of something with a great return, the first thing I’d ask them is if they themselves had put their money into this recommended investment (with associated cynicism regarding their answer).
The fact is that if an IFA could give you great advice on great investments, they would very likely not be a Financial Advisor at all, they’d be an Investor.
So Who Should You Ask for Good Financial Advice?
I’d actually advise you to back yourself first.
Get yourself a good financial education. Do this by reading but also by dabbling.
Yes, dabbling.
Dabble a little in some different markets as far as you can. Risk as little money as you can just enough to understand the market. These days micro-funding via P2P sites is extremely easy. You can also invest in property fairly easily and for the first time ever you can be part of the property market directly (not via financial markets) without breaking the bank or even needing a loan.
Back yourself – the resources are out there like never before and if you are prepared to do your homework, you can easily find out more for yourself than most Financial Advisors would tell you anyway, because when it comes to giving you a true overview of the market (i.e. and where you can invest your money) there are just too many stop signs for Financial Advisors (which translates to advice they’re not giving you).
Beyond this self-education – which is always a good idea, particularly when it comes to financial education – I just told you.
Ask an Investor.
I would take the advice of someone I know to be a successful investor over the advice of someone who calls themselves a ‘Financial Advisor’ every day of the week.
An investor has skin in the game. They are actually making investments and can tell you all about the market – i.e. the entire market and all the choices you actually have when it comes to investing your money because that is what they look at every day.
Investors make their money by making good investments. It is as simple as that. They do this by managing their risk, by understanding good and bad investment opportunities and by making sure they have the right mix of assets (including capital and cashflow) and liabilities.
Almost certainly a good investor will look beyond standard financial markets and include property and probably other alternative investments in their portfolio.
If you were to study the 1000 richest people in the world, I’m pretty sure it would be safe to say the majority of these have built a decent amount of wealth through property.
Property
In my view, property (real estate) is one of the best investments you can make.
Also for most people it is one of the safest investments you can make due to the fact it is something that is relatively easy to understand.
Most people don’t understand the financial markets (stocks & shares, dividends, warrants, options, swaps, CFSs, mutual funds, index-linked swaps… the list goes on), but they do know what a house is and they know roughly how and why it is valued and how and why it is used.
Above I described property as an alternative investment only through the eyes of a typical Financial Advisor who instead would tend to advise you on financial market investments.
Other Alternative Investments (Excluding Property)
First of all, if anyone suggests that you make an investment in Rare Earth Metals, Coloured Diamonds, Agricultural Land in Africa, Graveyard Plots or anything else that sounds the slightest bit out of the ordinary, then be very wary and very cynical.
There are plenty of scams out there.
This is not to say there aren’t good alternative investments out there, there are, but it is very important to understand the risks associated with alternative investments. One very obvious one beyond whether or not it is a scam in the first place is the strength of the secondary market. How easy is it to re-sell your investment should you wish to? With a house (property) this is usually pretty obvious and easy but let’s say you were persuaded to make an investment in some fine art. How easy is it to sell your painting later on and get it’s true value?
I have one very simple rule when it comes to any kind of alternative investment: I don’t invest in any market I don’t understand.
… and by understand I mean know inside out. Like the back of my hand.
So if you’re prepared to do your homework, and I mean really do your homework on a given market and begin by investing small because the only way to truly know any market is to have experience in that market – then by all means – put the work in and then consider investing in that market. For me most of the time, the amount of effort it would take for me to be comfortable investing in any new alternative market is just too great to justify getting involved, particularly given I have plenty of options with those markets that I am comfortable with.
Risk
So I mentioned risk above and though it’s really outside of the scope and main point of this article, this is effectively where investors make their money. I will write some more about risk specifically with some examples in another article but for now suffice to say when a lot of potential investors see something scary (i.e. which equates to a risk for their investment) this in turn presents an opportunity to any investor who can either see past that risk (in the case it’s only a perceived risk and not as bad as others think because they don’t have the same market knowledge) or who can mitigate that risk.
Another way to look at risk and its relationship to making money is that it is very difficult to make money without taking risk (i.e. the so-called win-win situation). If someone presents such an opportunity to you, it is likely that the risk actually is there, they just don’t see it – or even worse they do but they don’t want you to see it (until you’ve parted with your money). Always look for the risks.
Once you understand the risks, it may well be that there is a deal to be had. If you’re not quite there yet and not on top of the potential deal in terms of everything involved, most importantly it’s risk/reward ratio, then look to an Investor for advice, not a Financial Advisor.
Conclusion
For basic financial advice, back yourself. There are more resources out there than ever before.
Beyond that and if you want to turn things up a notch, seek out a successful Investor – but as always, be careful – ask them about risk. The reason I would look to an investor before a financial advisor is not because their advice is safer. It is because their advice is likely to be more informed and broader – this is not necessarily safer.
Ultimately you are responsible for your own financial decisions, never forget that.
This is why financial education is the most important foundation of good investment. Beyond that I want to know what my options are, and I mean all my options. This is why I have rarely asked financial advisors for financial advice (and have been disappointed whenever I have).
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