Saturday, 26 December 2015

The allure of Financial Advisors

I have to admit then when I first entered the working world, the experience of  sudden "huge" cash inflows monthly can be quite overwhelming. It is also at this stage where most of us will be targeted by Financial Advisors. After all, at that stage of our lives, we had few commitments, were eager to compound our wealth and probably had little or no Financial Literacy at all. The perfect target.

Then there is the feeling of exclusivity of having people managing your "wealth", advising you on which funds or assets to invest in. You are ok with paying a small fee for this service, thinking you are in good hands. Every once in a while, you might also receive updates or reports on the Macro economic situations, which uses terms such as "fiscal cliff", "monetary easing", "hunt for yield" get the idea. Sounds like they know their stuff.

But is it all good really? Well, I have the following questions you could ask yourself about this.

  1. Is the advisor a true friend of yours that you have known for many years?
  2. If the answer to the above question is no, is there a conflict of interest if the advisor's monetary gain is achieved by making you invest and maintain a sizeable investment portfolio, irregardless of the portfolio's performance? In other words, the advisor makes money irregardless of whether you make or lose money.
  3. Is your investment decision based on just a few meetings with the advisor and by him showing you some of the funds that had made money in the past?
  4. Lastly, the most important of all, did the advisor show you his company track records of how actual client portfolios, net of fees, performed in the past? AND benchmark the performance to anything at all?
By answering the above questions above, I believe most would have realised they are letting the advisors handle and manage their money purely by faith. Faith in that their investment portfolio will turn out well in the future. What is the basis of this faith really?

As Jon from BigFatPurse has said in the last few paragraphs of his post, Financial Literacy (the lack of it), compounded over time can lead to loss of tens or hundred thousands of dollars. One can no longer afford to ignore it because one "finds it too complex to understand".

Hope this article can inspire people to take some concrete actions towards improving their financial literacy.