Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, August 6, 2009

The Biggest Investing Mistake You Can Make

You’ve spent substantial time going to school to learn your vocation. That may have included undergraduate college, graduate school, a trade school, or extensive, on-the-job training. Then when it comes to investing your hard-earned money, you give the responsibility to an investment advisor after a short one-on-one meeting with him or her. The biggest mistake you can make as an investor is not taking the time to check out the advisor’s credentials, reputation and capability.

We are skeptical every time we hear someone talk about how happy they are with their investment advisor. They say: “Oh he’s so nice!” They don’t talk about his qualifications or reputation --- just that he’s nice. What’s the chance they spent any time really delving into his background? Does it make sense to turn over $100,000, $200,000 over a half-a-million dollars of your hard-earned money without carefully researching a potential advisor’s qualifications?

The recent economic crisis has exposed a number of “Ponzi” schemes where investment advisors use the principle of new investors to pay the investment returns of earlier investors. Bernard Madoff cost investors some $50 billion! Art Nadel, in Florida, soaked investors for $350 million. And just recently another $53 million Ponzi scheme in Michigan was discovered. It’s typical for the creators of these schemes to be very personable, promote their schemes through “friends” and to be huge contributors to charities. Therefore, you need to be very careful about relying on friends’ recommendations.

If you manage your own funds, be honest with yourself. Are you really qualified to do it? Do you have the time to do it? Another big problem with individuals managing their own investments results from making decisions based on emotions. There’s a whole new field called “Behavioral Economics” that deals with the psychological problems inherent with investing. Individuals typically hold on to both winners and losers too long. A professional investment advisor can help avoid the emotional hurdles of investing.

So how do you go about checking out an investment advisor? Start with asking about his training and credentials. There are a myriad of designations used but perhaps the most recognized is the CFP® (Certified Financial Planner) awarded by Certified Financial Planner Board of Standards. Check with registration and regulatory agencies to find these types of advisors and to see if there are any reported problems with the advisor. Following are a couple of useful web sites: Certified Financial Planner Board of Standards FINRA
(Financial Industry Regulatory Authority) Broker Check Link to Better Business Bureau locator

Ask the advisor for their Form ADV- Part II that all investment advisors are required to give prospective clients. Ask for references. Check the local Better Business Bureau. Ask the advisor how he/she is compensated. Do they receive commissions? Are they fee-based advisors who receive a percentage of assets under management? Or, do they charge a fixed or hourly fee? Do they sell products?

The above is a good starter list to check out a prospective advisor. In our next post we will provide a list of questions to ask yourself about your current investment advisor (assuming you have one). It was previously published in the Oakland Press’ Oakland Insider insert about a year ago. It’s worth repeating, as many of our current readers may have missed it.

The bottom line is that you should have a nice investment advisor, but being nice should certainly not be the top requirement. Take time to check out your financial advisor carefully and you’ll avoid the biggest mistake investors can make.


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