What You Should Know About Investing Before Going to a Financial Advisor

When it comes to investing, many people choose to use a financial advisor since they do not have the particular knowledge needed to make investments and manage other aspects of their finances on their own.  This is similar to going to a car mechanic when one does not know how to fix the car himself.  A good car mechanic will have more experience at fixing cars than most people, does the repairs everyday, has some specialized training, and probably has some special tools that the do-it-yourselfer would not have.   It can make sense for an individual to take the car to the shop even if one could make the repairs oneself. (Note, this post contains affiliate links.  This means that we make a small advertising fee when you click through a link and buy something on Amazon.  This costs you nothing extra and keeps these articles free for you.) Likewise, a good financial advisor will have specialized training and experience from helping clients every day.  They will be reading up on the latest research, have time to monitor the performance of the investment choices they make, and the temperament to stay the course when things get rough because they’ve seen things before.  It can make sense for an individual to use a financial advisor even if one does have some understanding of finances.  One might be perfectly competent to choose mutual funds for their 401k, but know little about taxes or life insurance. Also, as with auto repair, while one might be able to change one’s own oil or replace one’s own brakes, one may not wish to spend the time doing so.  Instead of spending a Saturday pouring over annual reports, one may wish to hire the work out.  As is discussed in the great book, The Millionaire Next Door,  the rich tend to spend their time at their chosen profession or with their families instead of doing things themselves to save the cost of hiring a professional.  They figure they can make more money doing their profession than they can save by doing things themselves.

As with car repair, however, if one knows nothing about investing, one is left at the mercy of the financial planner.  Unfortunately, there are unscrupulous financial planners out there just as there are unscrupulous auto mechanics.  Just as it is best to know the basics of auto repair before going to a mechanic, there are basic things about investing that you should know before going to a financial planner.  The following are competencies one should have to allow one to ask the right questions of their financial planners: 1.  A basic understanding about the different types of assets and their behaviors.  The SmallIvy Book of Investing: Book1: Investing to Grow Wealthy is a good place to start.

2.  An understanding of the effect of diversification, volatility, and time frame on investment risk.  See Stock Trading and Investing Tips for Beginners. 3.  An understanding of the risk and reward for different asset classes.  For example, see the post Understanding risk and reward. 4.  An understanding of what type of investing is appropriate for different stages of one’s life.  For example, see the post The Stages of Investing. 5. An understanding of the role of growth assets and income assets in a portfolio, commonly referred to as “stocks and bonds.” 6.  An understanding of the different types of mutual funds (open funds, closed funds), the different fee structures (load, no load), and the different investment strategies (momentum investing, value investing). 7.  An understanding of the effect of frequent trading, called churning, on fund performance (basically, a lot of activity drives up fees).  Also, an understanding of appropriate levels of fees (funds with fees below 1%, ideally below 0.50%, are best). Some of the classic books on investing will help provide a good foundation.  For example, A Random Walk Down Wall Street,
One Up On Wall Street: How To Use What You Already Know To Make Money In The Market
and The Warren Buffett Way
are all excellent.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.