How To Find A Financial Advisor You Can Trust
12 Questions You Should Ask Before Putting Your Hard-Earned Money At Risk
Key Ideas
- 6 simple rules to determine if your advisor is walking the talk.
- How to know if your advisor is honest.
- The 5 warnings signs to watch out for.
How can you tell the difference between false prophets and legitimate financial advice?
How do you know if the financial expert sitting across the desk can actually help?
Is his primary interest to pad your pockets, or his own?
Below are 12 questions to consider before placing your trust in anyone claiming to be a financial mentor, advisor, money manager, expert, or guru.
This list results from a lifelong career as both an investment advisor and financial educator. It's a common sense, insider's guide to financial advice so you don't get ripped off.
Get This Article Sent to Your Inbox as a PDF…
1. Is The Financial Advisor Already Doing Exactly What He Advises You To Do?
The advisor must have a successful track record practicing exactly what he preaches. Nothing less will suffice. What that means is:
- Don't get your investment advice from someone who built his wealth through marketing investment advice instead of actual investing. This holds true for many big-name financial gurus, money managers, brokers, and advisors.
- Don't get your investment advice from someone whose primary function is to sell investment products (stocks, bonds, mutual funds, etc.) because it's an inherent conflict of interest that biases the advice you receive. This is especially true for most stock brokers and financial planners. Instead, separate the investment planning function from the investment product sales function. Pay for each separately.
- Don't get your financial advice from academics with lots of fascinating theories but little real world experience. Real world practicalities differ from theoretical academic assumptions.
- Don't get your financial advice from authors and writers who are paid to write, not invest. Their skills and experience are for writing – not investing.
- Don't get your stock investment advice from someone who built his wealth in real estate or business because success in one field doesn't necessarily equate to success in a related, but different, field. The critical issues to success in each field are subtly but significantly different.
- And last but not least, never accept financial advice from anyone who isn't already financially successful because they lack one necessary qualification: proven results. That includes your Uncle Bill, parents, friends, coworkers, and anyone else you know who has an opinion (doesn't everyone?), but no results proving the quality of that opinion.
In short, only learn from those experts who have “walked the talk” before you and can speak from personal experience with integrity.
Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.
There are many self-proclaimed gurus out there, but few have gotten muddy in the trenches at the school of hard knocks and emerged with enviable results and valuable lessons to share.
You're better served moving on to someone who can speak from actual experience doing exactly what they're advising you to do.
2. Is The Financial Advisor Still “Walking the Talk”, Or Is He “Marketing the Talk?”
When I became a real estate investor, I sought out experts to teach me a wide variety of investment strategies, including foreclosures and tax lien investing. What I learned surprised me.
Many of the big name gurus no longer practiced what they preached. They did the tax lien or foreclosure business years earlier, and switched to selling instructional courses about their experience once market conditions changed.
The fact was they no longer invested according to what they were teaching.
“Walking the talk” means doing the same thing with their own time and money that they recommend you do. If they recommend you invest a certain way, then it should be good enough for their portfolio as well. If not, then why?
Always act cautiously when someone is pitching an investment if their money isn't at risk exactly like yours will be.
The fact that my tax lien and foreclosure teachers weren't investing in tax liens or foreclosures at the time was important information. It raised a red flag and motivated greater due diligence. After a little more digging, I learned the reasons why, and it saved me a lot of wasted time and money.
Anytime someone is selling you an investment or educating you on an investment strategy, find out what they're doing with their own money. You should be concerned whenever someone isn't investing using their own advice.
The one exception to this rule would be when the advisor's financial goals and needs are so different from the student's that different strategies for each party are appropriate.
3. Will The Advisor Show You Actual Proof That His Financial Advice Works?
If your advisor is a successful investor, then they should have verifiable results to back it up. If they won't show you proof, then you should wonder what they're trying to hide.
For example, I have an extensive list of client testimonials for my coaching services, newsletter, and educational products providing independent testimony to their results and value.
In addition, I provide references of past and present clients to those prospective students who are seriously considering a coaching and mentoring relationship and want to verify the service quality.
The real proof, however, is in my actual financial results. I have more than $1 dollar in liquid net worth for every dollar I have ever earned in my lifetime as verified by Social Security Administration documentation.
Very few people can pass this test. Do you have more money sitting in investment accounts than you've earned over your lifetime?
The only way your liquid net worth can exceed your lifetime earnings (placing a zero value on your home and business assets) is if you inherited a lot of money or you're good at managing your personal finances and investments.
Results speak the truth – accept nothing less.
4. What's The Financial Advisor's Background, Education, Training, Skills, and Experience?
Not all financial advice is created equal.
A hedge fund manager who has completed many years of independent research with twenty years of real time trading experience will provide advice from a higher quality experience base than a business school graduate trained in product sales by a brokerage firm.
Learn from the best and accept nothing less.
The sad reality is many financial advisors are trained by their parent company to tow the party line. Few financial advisors have completed any independent research to provide a basis for forming their own investment opinions.
Their knowledge is often limited to official policy, traditional practices, and company dogma. The result is they speak the company doctrine as if it were true because that's all they know.
They aren't bad people: they just don't know enough to know what they don't know. The net effect is you get bad financial advice.
Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.
You can't understand a person's financial advice until you know the shoes they're standing in. Their experience and training color their advice.
There are several levels of knowledge in the financial advice business, and the unfortunate reality is the bulk of retail financial advice comes from the ground floor level. You want top floor financial advice.
For a complete listing of resources to investigate the background and experience of your investment broker or financial advisor, please see the related articles in this site under “investment due diligence” and “investment fraud prevention“.
5. Has The Financial Advice Been Tested Through Multiple Market Cycles?
Building and preserving wealth requires a full-cycle perspective.
You must not only make money during rising markets, but you must also preserve that wealth and control losses during declining markets. Anything less is only half of an investment strategy.
Beware of the “one-hit wonder” that gets lucky by investing in the right place at the right time and then goes on to write books about his financial expertise. Don't be misled.
Just because someone loaded up on technology stocks or real estate before a bull market handed him sudden wealth doesn't mean he knows anything about how to preserve that wealth during the next down cycle, or how to grow it through different market cycles in the future.
If you're not clear on the importance of this point, then check out the legal and financial history behind people claiming to be financial experts. The internet makes the process of uncovering dirt on anyone remarkably easy.
You might be surprised to find out which “experts” have a history of bankruptcy, financial, and legal problems (their names aren't listed here to avoid legal hassles).
They might be masters at marketing and leverage who ride high on the wave of their latest endeavor, but their checkered history shows an inability to manage risk and preserve that success through a full market cycle.
Just because someone is famous doesn't make them immune from this rule.
Make sure the financial advice you receive has been tested through inflations, deflations, bull markets, bear markets, nuclear melt-downs, Presidential assassination attempts, and anything else you can imagine. Murphy's Law is “law” for a reason.
Anything that can go wrong will – and at the worst possible time – so make sure your financial advice can manage risk for the worst outcome and profit under all reasonable assumptions.
6. Are You Being Told The Negative Along With The Positive?
There's no perfect investment strategy. Anyone claiming to have one is either self-deceived, or a liar.
You don't understand an investment until you know all the ways you can lose money with it.
“A piece of advice always contains an implicit threat, just as a threat always contains an implicit piece of advice.”– Jose Bergamin
If the person offering you financial advice isn't forthcoming with all the potential problems (so you can make a fully informed decision), then you aren't getting the whole picture. You need to know the risks as well as the potential rewards. Settle for nothing less.
Similarly, if your investment advisor isn't forthcoming with his mistakes and losing experiences, then they're either inexperienced or dishonest.
I have made more investment mistakes than I have room to share with you here, and I've also made enough good decisions to have done very well over time.
Every investor makes mistakes, and every financial strategy has an Achilles heel. Learn them, or risk being blindsided.
7. Does The Financial Advice Over-Simplify An Inherently Complex Subject?
Buy and hold is one of the simplest investment strategies available. You can explain how to do it in just a few paragraphs.
Yet, it would take an entire book to fully understand the risk versus reward implications of this strategy in your portfolio today.
Highly trained financial experts using identical data to prove their points can't agree on even the most simplistic financial advice such as buy and hold, let alone more complex financial issues.
Be wary of financial advice that's reduced to clever sound bites or appears to be cut and dry. If it's that obvious and simple, then it's probably wrong or incomplete.
Most financial issues, when deeply understood, are subtle shades of gray. They require a depth of understanding that leads to a well-considered decision.
“Honest advice is unpleasant to the ears.”– Chinese Proverb
When you encounter financial advice that makes the investment process sound easy, just assume it's a sales technique.
Salespeople know the average investor is averse to complexity and wants his financial decisions handed to him, neatly packaged, on a silver platter. For that reason, they simplify the analysis to make the decision easy for the client so they can get the sale.
Building wealth isn't easy, and investing properly isn't simple. If it was, more people would succeed at both. However, they don't, and the statistics prove it.
No matter what the gurus tell you, building wealth takes persistent work, well-developed plans, diligent follow-through, and involves risk.
I know financial advice like this won't maximize my sales, but it gets results for those who are willing to follow it.
8. Is The Financial Advice Driven By Facts or Opinion?
Never confuse facts with opinions in the financial advice you receive.
Opinions are useless clutter that complicate investment decisions. Facts are what matter.
Most financial advice blends the two together, and your job is to extract the few facts from the myriad of opinions so you can disregard the rest.
Examples of opinions include:
- A forecast for the economy
- What price levels a stock is expected to go to
- What a company is expected to earn
- What industries should grow the best
Ignore all such nonsense because it requires an accurate forecast for the future, and forecasts have conclusively proven to be unreliable through multiple independent studies.
“To know the true reality of yourself, you must be aware not only of your conscious thoughts, but also of your unconscious prejudices, bias and habits.”– Unknown
Facts worth knowing include current valuations and what those valuations imply about expected returns based on historical precedent.
Other facts include what's happening now or what has happened in the past, as contrasted with opinions about what's expected to happen in the future.
Facts are true and knowable right now and include hard data and numbers. Opinions result from the interpretation of those facts.
Never confuse opinion with fact because it can muddle your thinking and lead to erroneous conclusions.
9. Is The Financial Advice A Complete Strategy Or Just A Half-Truth?
What good is a buy recommendation without clear criteria for when to sell? What good are sell criteria without a clear strategy for reinvestment?
Beware of any advisor providing a buy recommendation without simultaneously providing clear criteria that would invalidate that same advice and force a sell. Quality investment advice provides a complete process of buying, selling, and reinvesting.
Even more important is that all buy, sell, and hold recommendations are based on thorough historical research indicating a positive mathematical expectation.
Anything less is gambling.
In short, all investment advice must be a complete process in order to be actionable. It should be based on a proven, positive mathematical expectation to reliably profit and meet your investment objectives.
Is your financial advice providing all the information you need to take proper action? Is it based on someone's beliefs, forecasts, or hunches rather than quantitative research and historical precedent? If yes, then it's gambling rather than investing.
10. Is Risk Management A Primary Focus, Or An After-Thought?
Risk management is what separates professional investors from amateurs.
It's how your investment portfolio can earn consistent returns through a wide variety of market conditions. For that reason, I would never trust a financial advisor whose first concern wasn't managing risk and preserving capital.
“I violated the Noah rule: predicting rain doesn't count; building arks does.”– Warren Buffett
Unfortunately, most financial advice focuses on making money – the offensive half of investing – because that's what sells best.
Risk management teaches you the defensive half of the investment game by showing you how to control investment losses when adversity strikes.
A complete financial strategy requires both halves of the investment equation to earn consistent returns with a favorable risk to reward ratio. Anything less is a dangerous half-truth.
Get This Article Sent to Your Inbox as a PDF…
11. How is Your Financial Advisor Compensated?
You can't determine the validity of the financial advice you receive until you know how your advisor is compensated for providing it.
For example, magazines and other media are driven by subscription and/or advertising revenues. Therefore, the publisher has an incentive to provide financial advice that maximizes those revenue streams even if it's diametrically opposed to your best interests.
Stock brokers and financial planners are often compensated by commissions and other incentives which can affect their recommendations.
This is why their financial plans seldom include direct ownership of investment real estate or building a business even though these are two of the most common ways to build wealth (click here to see our entire wealth strategy course so you can retire earlier than old).
“Free advice is worth half the price.”– Robert Half
You should always separate the financial advice function from the investment product sales function, and you should pay for them separately. Anything less causes a conflict of interest.
At Financial Mentor, the only thing we sell is financial education to help you retire early and wealthy. We have no hidden incentives from investment product sales or advertisers to bias what we say.
We never tout stocks, mutual funds, or any other investments, and you should be wary of financial advice from anyone who does.
Our job is to help you understand how the financial world works and what it really takes to build wealth.
When you're armed with the proper knowledge, then you can take control of your financial future and make the best decisions for yourself while ignoring all the biased and conflicted advice you receive from others.
12. Is The Financial Advice Generic, Or Is It Designed To Your Personal Needs?
One size doesn't fit all.
You're unique with different goals, resources, abilities, and needs compared to everyone else. Does the financial advice you receive take those unique characteristics into account?
It's not enough for your financial advisor to type your personal information into a computer and have it spit out a pseudo-customized financial plan with glossy pie charts designed to gather dust on your office shelf.
A computer can't know your skills, interests, and abilities, and these very attributes are what you'll be leveraging to build financial security.
Similarly, beware if your financial advice is coming from a one-size-fits-all seminar or generic “mentorship” program. The odds of it fitting your individual needs are very slim.
The same goes with newsletters and magazines that can't possibly provide advice specific to your personal situation. After all, how can information simultaneously provided to millions of people at the same time be personalized to your needs?
That's why I designed the Seven Steps to Seven Figures course series into individual step-by-step modules. You only have to take modules appropriate for your personal needs. You don't have to waste time on inappropriate or unnecessary information.
You start your education based on what's most important to you now and end where you want so you get only the information that's right for you.
In Summary
Always remember that information from investment product sales people and the media should be taken with a grain of salt and a pound of caution.
Never invest based solely on their financial advice without completing your own due diligence and forming your own opinion based solely on the facts provided to you.
Ask first if the financial advice you receive can pass these twelve questions. Otherwise, don't put your money at risk:
- Is the advisor already successfully doing exactly what he is advising you to do?
- Is the advisor still “walking the talk”, or is he just “marketing the talk?”
- Will the advisor provide documented proof that his advice works?
- What's the advisor's background, education, training, skills, and experience?
- Has the advice been tested and proven successful through multiple market cycles?
- Does the advice provide a balanced viewpoint with both positive and negative attributes, or is it a one-sided sales job?
- Does the advice over-simplify the inherently complex nature of investing in an effort to make the sale?
- Is the advice based strictly on facts or does it include meaningless opinions?
- Is the advice a complete investment process, or a half-truth?
- Does the advice focus primarily on risk management and capital preservation?
- How is the advisor compensated? What are his conflicts of interest?
- Is the advice personalized to your needs, or is it generic?
Learn how to manage all the confusion surrounding the conflicting and contradictory financial advice so you can make well-educated decisions that are appropriate for your unique path to wealth and independence.
When you know how to sort good financial advice from bad then you can make smarter, more profitable investment decisions. I hope this due diligence checklist helps.
Invest Like Todd!
A better investment strategy than buy and hold - Makes more by risking less
Discover the scientific investment process Todd developed during his hedge fund days that he still uses to manage his own money today. It’s all simplified for you in this turn-key system that takes just 30 minutes per month.
