We all recognize the wisdom of avoiding any discussion about politics and religion at a family dinner table. Some of us prefer to keep certain things private, while others may be more open to sharing without the urging required. Yet, whenever people come together, there is always that person who starts giving out unsolicited financial advice and even an investment tip, delivered in a soft hushed voice and insists on referring you to their advisor.
It’s almost impossible to refrain from indulging in financial discussion when we are bombarded with varying and often conflicting forecasts about the prospects of our economy and the volatile stock market. The worries are not too far from reason when we feel the burden of making sound financial decisions to protect and optimize our wealth potential. So, in the end, a referral to a financial advisor, solicited or otherwise, may not be that unreasonable, especially if it’s coming from someone close to you.
In fact, that is how most people start their advisor search, a referral from a favorite aunt, uncle, or their accountant. However, should you trust your life savings to another person based merely on a suggestion?
We are inclined to trust those around the proverbial dinner table. Still, even if the experience with their financial advisor has been successful, what assurance do you have that the same advisor will deliver similar results for you or that your uncle even completed any meaningful due diligence on his advisor?
According to a National Financial Educators Council survey last year, mismanagement of personal finances costs approximately 254 million adults in the US, a total of more than $352 billion annually. The importance of obtaining requisite financial intelligence to build wealth has never been more critical if we are to reduce our growing dependency on the country’s social and welfare programs, which is already at a breaking point. The gravity and benefits of selecting the right financial advisor for guidance cannot be understated. Perhaps choosing a financial advisor based on “gut calls” built around a familiar recommendation and anecdotal credibility check shouldn’t replace the need for data-driven, evidence-based due diligence.
Choosing a financial advisor can be quite tricky, considering that the US Bureau of Labor estimates that there are over 350,000 professionals who call themselves financial advisors in the country, not to mention another 300,000 that work for broker-dealers and dispense financial advice under a myriad of different professional terms. Compounding this confusion, advisors accompany designations after their names with unfamiliar acronyms only to exacerbate the consumer’s challenge to finding clarity and familiarity.
Additionally, not all the information you obtain about a financial advisor is accurate, up-to-date or complete. While the Financial Industry Regulatory Authority, a self-regulatory organization, and the US Securities and Exchange Commission do their part to introduce fairness and transparency, much more needs to be done. Too many bad actors are still navigating the regulatory and industry loopholes to jeopardize the financial security of many vulnerable consumers.
While searching for and trusting someone with your wealth might seem highly daunting, in light of the current challenges, the benefits of having the right financial team help you plan dramatically outweigh the bad. According to a recent study by Vanguard, working with a financial advisor can potentially increase your returns by 3% annually. So perform your due diligence on advisor candidates, and get smart about critically thinking through the mounds of information available in the marketplace.
As you gather with friends and family this holiday season, share the warmth and laughter and reflect on the virtues of hard work and planning. Selecting the right financial advisor may be your most important financial decision.
Steven Park is a principal and executive director of Alexandria Capital LLC, based in New York. A more than 30-year veteran of the financial services sector, he serves as a senior advisor and board member to start-ups, entrepreneurs and business builders.