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Friday, July 25, 2014

Comparison shopping

When you go shopping for a house, TV, clothes, or car, you understand that you need to shop around.

Shopping allows you to better understand the nature of the product you might buy. What are the options? What is the price range? How is the product sold? How is it supported after purchase?

If you don't do a good job of shopping around, you are very likely to pick an inferior product or pay too high a price. So, it pays to shop around.

The same can be said when it comes to looking for investing or financial advice: you need to do some comparison shopping. (In fact, I think that the expense and impact of good or bad financial advice far out-weighs the cost and benefit of a house, TV, clothes or car. But, then again, this is what I do for a living.)

But, many consumers don't comparison shop for investing advice. They pick the person they already know who does it, or a golfing buddy. Some people ask for referrals from friends, family or coworkers, but then don't find out who else is out there or what they have to offer. How do you know what you're getting is any good if you don't know what else is being sold and at what price? The worst way to pick such advice is to wait for someone to come to you--you know, the shark with his fin showing.

What types of things do you need to find out from a potential adviser? Start with their track record: how are they doing with their own money?

Would you want to work with a plumber who can't fix her own pipes, or a doctor that can't successfully diagnose patients? Then, why would you want to work with an financial adviser who hasn't succeeded financially themselves (or are on a clear path to doing so)?

It is shocking how few advisers follow their own advice. Most mutual fund managers don't put but a small amount of their own cash into the fund they manage. Many sellers of insurance and annuities buy the minimum required so they can say they buy the product they sell. A good adviser puts most of their money into the product or service they sell. If they say it is good for you, why wouldn't they be fully invested themselves?

Another thing to find out from an adviser is how they are paid. If they are paid a commission to sell a product, don't expect much support after the sale. If they pass you off to someone else after the sale, you just bought a service from a rainmaker--good luck with that. The best situation is when their pay is aligned with your interests in some way. If you don't understand how they are getting paid or they are evasive in answering your questions, be wary.

Another question to ask is how much a potential adviser charges? Be careful, because you may be comparing apples and oranges. A Porsche doesn't sell at the same price as a Yugo, so don't expect a good adviser to be lowest cost. Make sure you understand how much you would be paying relative to similar services. If the rate is above or below average, then assess whether it makes sense to pay more or less. Higher touch service is higher cost, so is higher performance service. Price is not a figure in a vacuum, it belongs in the context of the value you are getting.

Finding good financial advice is hard. There just aren't that many people out there who are good with their money. Also, the investing advice business is structured to sell products and services, not specifically to help clients, so investors are understandably wary.

To get good advice, you need to shop around. Find out what services are available at what price. Talk to many people in the field to get to the point you understand what you are buying and the quality of the person you are buying from.

As they say, if you don't know jewelry, know the jeweler. To get good investing advice, you don't need to know investing, but you do need to know your investing adviser.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

1 comment:

Michael Rivers said...

For instance: http://www.sl-advisors.com/fund-managers-invest-elsewhere-exploit-clients/