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Are Financial Advisors Worth It?

When I took my first job as a financial advisor, I thought they knew about investing. My image of a financial advisor was a professional who knew the ins and outs of investing strategies. Someone who had an advantage because it was their job to know more than their clients and to be on the cutting edge of where the best places to put money would be. And I was wrong.

I quickly learned that financial advisors are in sales. This gave me my first taste of what the real world looked like. Everything I thought I knew about financial advisors was inaccuate.

They knew just enough so that the clients they dealt with wouldn’t know that their job was to sell products and harvest assets. I was amazed at what people would say to clients, to get them to do what they wanted them to.

It was at that moment I realized that many financial advisors don’t know anything about investing or strategies. This gave me a vision to continue to become a lifelong learner when it comes to investing and the best ways to grow wealth over time. Now, this isn’t true about all financial advisors, there are good ones out there. Like any profession, the news will cover the horror stories of the doctor who was running a pill mill. Or an attorney who stole money from clients. In any field, some are there to take advantage of people for their benefit and some are looking to help people solve their problems so that they can improve their lives.

How do you determine whether or not a financial advisor is ripping you off?

Well, where I would start is to first hire the advisor you feel good about to help you create a financial strategy for a flat fee. This will help you learn about whether or not this advisor you’re considering is a good fit for you. Over time this can help you figure out whether you’re working with someone who’s a wolf in sheep’s clothing. And if you truly want to see someone’s real self, tell them that you’re not interested in moving forward. Even if you want to.

This is a great test because someone who’s deceitful will immediately become abrasive perhaps even try to persuade you that you’re making a terrible mistake that you will regret. Scare tactics will ensue. On the contrary, if you tell someone no and they ask thoughtful questions to figure out what the reason behind your decision is. Then you may have a financial professional who cares about you. Or maybe they simply respect your decision and wish you well and that’s the end of it.

Ultimately, as the client you are the prize the financial advisor wants.

Similarly, when you make a new friend, the more time you spend with them, the more you will realize that either this person is going to stay a friend, or is someone who’s simply passing by. When you start working with a financial advisor, they all have different strategies that I’d like to make you aware of.

One strategy is that they offer a complimentary financial plan free of charge! Sounds great right? Well, if anything is free this should raise a concern because if someone is good at what they do, why shouldn’t they charge for their professional services? This is because many financial advisors focus on selling products to their clientele rather than building financial strategies. The reason why?

Typically it’s because they are going to present with you a financial plan that is going to point to different products for you to achieve your financial goals and objectives. One of the most common will be some sort of insurance product. This could be an annuity or life insurance and those products pay the advisor a lot of money. I’ve seen advisors make more than $10,000 selling a single product which is way higher than what an advisor typically would charge for a basic financial plan. It’s important to remember that if there is no product, then you are the product!

Insurance is not bad. There is a time and place where it makes sense for someone to purchase this product as a part of their overall financial plan.

Typically, I like to recommend insurance products or annuities in one of two situations. The first is if someone is very wealthy and it’s part of a tax strategy to minimize the amount of estate tax they will have to pay in the future. Secondly is if someone is in a profession where they have a lot of liability, say they are a surgeon that owns their practice. Purchasing these products can protect them in case they have malpractice suits so that their assets are sheltered from money-hungry attorneys.

Outside of that, some people are so scared about investing they want the guarantees associated with annuities or whole-life insurance products. Buying these products is better than not investing at all, but you’re not going to see returns to build wealth that’s going to outpace inflation by a lot. And that’s the reason to invest, is to make sure you’re keeping up with the price increases every year. If you don’t invest, then you’re going to fall behind over time and become someone who complains about the price of gas, groceries, and the air we breathe.

Outside of insurance salespeople disguised as a financial advisor, you’ll have advisors who want to push you toward having them manage your assets for a fee.

This is great for those who want to trust the “Experts” with their money to help them stay on top of all the latest and greatest investments to take advantage of for you as a paying client. The problem with this strategy is that most financial advisors are placing clients into managed accounts that are the same. Meaning, they have a mix of different mutual funds and ETFs which could be over-diversifying your portfolio and consistently charging you year after year for something that isn’t truly being managed.

Quick Segway: I had lunch with a financial advisor who works at a big faceless financial organization that has nearly 2 Trillion Dollars in Assets (as of 2024). He shared with me that when the market goes on a bull run. Meaning the market is going up. That their organization will force their advisors to pump the breaks as soon as the client’s allocation goes above a certain level. This is like the target date mutual funds. Essentially decreasing the risk regardless of whether or not the timing is good or bad. Now, this company will argue it’s to benefit their clients so that they aren’t taking unnecessary risks. But, let me ask you this. If the markets are doing well and momentum is strong. Should you immediately pump the breaks as soon as your allocation becomes slightly above what is “ideal” for your initial strategy?

My opinion is that this is detrimental to the investor because when you have a good investment and it’s starting to compound, you let that investment go with the flow.

Not immediately put a restraint on it just as momentum in the price may be building in a positive direction. This is one of many reasons that prevent investors from seeing their full potential. This is there to protect the financial institution from liabilities because they are so large it’s too difficult to manage everyone’s money in a way that is a more customized versus a generic one-size-fits-all all approach.

Now, some financial professionals do a phenomenal job for their clients.

They are out there, the reason you may have trouble finding them is that the big companies have set up their websites to be at the top of all searches when you go to the World Wide Web to find someone. These organizations do have programs where I’ve seen they manage money in a way that is more advantageous to investors. Unfortunately at the large institutions most people are familiar with. These programs are reserved for those who have a certain level of assets and aren’t offered to those who are working with less money. Thus, if you want a professional money manager, it’s paramount to find one that your goals are aligned with one another.

I believe that when someone is first getting started, you must take a chance to invest in areas that have the largest potential for long-term growth and success. Too many financially broke people don’t believe that they can take risks because they have too much to lose. Where in reality, if you’re looking to move from where you are to where you want to go you cannot afford not to take a chance to have the opportunity to change your stars.

 

To Growth, Family, and Philanthropy,

Joshua Krafchick | 369 Financial

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