You’re in the middle of reviewing your finances with your advisor when you say you’ve got a chance to get in on the ground floor of a great new investment. Your advisor suddenly seems to cringe. How can an advisor best tell you that you have a lousy idea?
First, give yourself credit for daring to both plan with your money and for finding professional help for that planning. A recent survey by insurance and financial services company Nationwide found that a quarter of investors do not have a financial plan and that more than one in three in that group has no intention of creating one.
The most frequently cited reasons investors gave for not working with an advisor: no perceived need for professional assistance and, to a lesser degree, fear of trusting financial advice from a stranger.
So you might already be coming to the advisor meeting with mixed, if not fragile, emotions. With luck, your advisor has the wisdom and diplomacy to wave you away thinking that a questionable move might be a good idea?
Such an advisor would:
1. Identify what you are trying to accomplish, whatever the idea. Do you really need the benefit that you seek from this idea? Is it worth your potential risk?
If, for example, your idea involves investing in a vehicle that brings high risk but the potential for equally high reward, your advisor needs to talk through the situation with you. He or she must try to help you understand that if you really need such a return, this idea might not be really worth the risk.
2. Provide alternatives. After your advisor identifies what you want through the idea, you need to both discuss other possible ways of obtaining what you want – especially those potentially less harmful to your overall financial situation.
Compare and contrast your idea with the alternatives; perhaps make a list of pros and cons of each possible decision. Rather than simply dismissing your views, your advisor needs to also encourage your objectively investigating the given company’s industry, profitability history, competitors and other details.
3. Focus on how the idea fits into your long-term money strategy. Does the idea really even make sense for your particular financial situation or did it just sound like a good idea to you at the time?
Step back and, with your advisor, examine not only the size of the potential returns (and potential loss) but also when you can expect any good returns. Timeframes greatly influence desirability of an investment.
Are you investing to build funds for your child’s tuition in five years or for your retirement in 20? Generally, the longer before you need the money, the more risk you can assume. A good advisor will walk you through all aspects of this investment, including what its returns can fund both today and tomorrow.
You hired this professional for a reason. When it comes to financial ideas and decisions, that professional on your payroll must give you an honest opinion. Anything less and you’re wasting your money in more ways than one.
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Karl Schwartz, CPA, CFP, is a consultant at Hewins Financial Advisors, LLC in Miami.
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