In a previous article, I spoke about how advisers get paid and the type of advice or products they may recommend depending on how the advisor gets paid for that advice.
In this article I want to expand a bit further to whether or not the advice you’re getting is really being followed by the person giving it.
Admittedly, there is some advice that may need to be given that may not pertain to the adviser giving it. One area may be debt reduction advice if the adviser doesn’t have any debt (but has practiced good money management principles to avoid it). Another area may be the physician that recommend proper diet and exercise to an overweight individual and yet the doctor may be physically fit.
What I’m talking about is the adviser (or doctor) that doesn’t practice what they preach. For example, an advisor may give advice regarding where a client should invest their Roth IRA. Preferably for the adviser, the client would want to invest their money with him or her and the adviser may only recommend commissioned or load mutual funds while the adviser invests his 401(k) money into index funds.
This is a very common practice especially among bigger firms with many employees as advisers. The firm offers high commissioned products such as annuities and commissioned mutual funds for clients’ IRAs or retirement plans but the firm’s own 401(k) plan holds only index fund options and zero annuities. Yet their advisers will tell their clients that their products are the best for them. If that’s the case, why doesn’t the firm offer their own products in their 401(k)?
Another thing you’ll see is an adviser or broker touting the next hot fund or the stock of the day. A great question to ask is if they own it themselves – and why. Generally you’ll find that they don’t own it and usually the recommendation is trickling down from company headquarters. Another great question is would they recommend it to their own family. Watch their face – it may say more than their words.
You may also want to be careful when it comes to the talking heads on TV. Self-proclaimed financial gurus and big dogs are generally getting paid through endorsements, book deals and from the network they broadcast on. This is how they make their money. In fact, some deeper digging will find some of these people have actually lost A LOT of money investing or becoming heavily debt laden only to file bankruptcy.
An adviser may be recommending sound money management advice while at the same time his credit card is maxed out, he has a high car payment and he’s living paycheck to paycheck. Granted, this adviser would probably never admit this but it doesn’t hurt to ask how they feel about money, debt, etc. How can an adviser manage your money if they have no control over their own?
Finally, trust your gut. If something doesn’t feel right – it usually isn’t. If you go in for budgeting advice and the adviser tries to sell you insurance – this isn’t a good sign. If your adviser hasn’t been around very long, but is in a fancy office and a new car is out front – they may be trying to appear successful, but are struggling to get by.
Ask a lot of questions when you talk with your prospective adviser. Just like you’re a potential client for them, they’re a potential client for you. It works both ways. You can do an internet search on their business, and even verify if they have any industry credentials. There are even websites where you can verify their tenure in the industry and whether or not they’ve received any disciplinary action.
The main thing is that you want an advisor that believes in the advice they’re giving you and most of the time follows their own advice.
