As investors, our main goal is to increase our wealth and build a healthy nest for our lives and the lives of our loved ones. No rational investor intentionally hopes to lose money. We all want the same thing — to make more money. After all, a healthy portfolio means we’ll ultimately have the financial freedom to live comfortable lives and provide for our loved ones. Does it not? A wrong call from your investment broker or financial advisor, can leave you at a loss in a matter of seconds. And then what? Some of us don’t have the luxury of taking a gamble on our investments. In fact, most of us are dependent on that hard-earned money to sustain us through our non-working years.
So, why is it that so many people blindly trust their financial well-being to the hands of their financial advisors?
Mistake No. 1: Hiring and forgetting.
While it may seem like a wise move to leave it up to the professionals, entrusting your finances to someone you barely even know, isn’t always smart. Although the rationale is there (sure, we can agree many advisors are experienced in several markets and know what they’re doing), they don’t always have their client’s best interest in mind. In other words, the majority of the investment decisions they make on behalf of you, are usually aligned with their firm’s expectations to promote certain financial products, which may not always be best for your portfolio. Their first priority is meeting the requirements of their firm and then yours. Just because you hire someone to invest your assets, doesn’t mean you shouldn’t ask questions and understand every decision they make with your money. Practicing due diligence is one of the most important things you can do as an investor.
Mistake No. 2: Not dedicating time to your investment strategy.
Your financial advisor would prefer if you didn’t bother to check your portfolio performance, or re-asses your investment strategy every year. He’d simply give you his advice and suggest what to do next — even if it means a higher commission for him and less gains for you. It’s ironic that as consumers, most people will extensively spend time researching what they’re planning to buy, but as investors, they simply leave it up to a stranger to tell them how much to invest and where to invest. No questions asked. How is investing any different from making a large purchase?
Mistake No. 3: Not asking questions.
Ignorance is not bliss. If you aren’t asking questions (and plenty of them for that matter) with regard to how your money is being managed, you are doing yourself a disservice. You won’t be able to catch high fees that are offsetting your gains, or even realize that you’re investing in something with a higher risk than you feel comfortable with. You really have no idea what is going on aside from what your advisor communicates to you. Don’t shy away from asking about your advisor’s background, experience and decisions regarding your investments. These are questions you should be asking from the beginning and continuously throughout the the terms of your investments.
Mistake No. 4: Overlooking the fees.
It’s easy to invest through a recognized financial institution and forget it about it. The problem with this is that many of us will often overlook how much of our investment earnings goes towards fees. Depending on services received, your advisor may charge you differently. While some advisors will charge hourly rates, or a combination of fees and commissions, most advisors will charge a percentage of your account value, which usually ranges between 0.50% and 2%. This may seem like a small amount to some, but when your investments are yielding generous returns, your advisor will also receive notable compensation. And if you don’t know what you’re paying in fees, chances are you’re paying a lot more than you probably should be.
Mistake No. 5: Trusting their advice, wholeheartedly.
Your advisor may steer you away from potentially lucrative investment opportunities if those
options are not offered by their firm. And in many cases, simply because there is no incentive for them to promote other investment opportunities (even if these options are more aligned with your financial goals). Advisors would much rather you invest money in affiliated financial products rather than a real estate venture, or alternative investment. Understanding both institutional and non-institutional investments and their associated levels of risk, will help you better determine what your options are. Don’t be reserved when it comes to your wealth. Question your advisor’s decisions regarding your money and always remember it’s your money. Never feel obligated to follow your advisor’s advice. If you decide it’s best to invest elsewhere, the choice is yours. To be a wise investor, you don’t need to have a background in finance, but you do need patience and a lot of common sense.