A great financial advisor can help one map out an investment strategy, provide access to research and information, save an investor time, monitor and rebalance one's portfolio, and assist with paperwork. However, some financial advisors have an inherent conflict of interest, may not act in their clients' best interest, rarely if ever outperform the market, and over the long term their fees can cost an investor 50% of their total returns.
Seeking advice on savings, investing, tax, etc., among other financial issues is prudent. However, it is best not to bundle the advice you get on your investments with any other type of financial advice.
Here is what you need to know:
There are two types of financial advisors:
Those who get paid on an hourly basis or on a fixed, quoted fee, to provide advice, and
Those who will receive some or all of their compensation as a percentage of what you invest, or a percentage of your total assets, (i.e., the money you have invested).
If you are dealing with an advisor who will receive some form of percentage compensation, you need to be careful. Here's why: A used car salesman and real estate agent only get paid when a sale is completed. Thus, their interests are not aligned with your interests. You want a good car at a fair price, they just want you to buy a car, any car. You wouldn’t just buy a car because the salesman said it is a good deal. It’s the same with commissioned financial advisors.
A financial advisor, let's call him Bob, who gets paid a commission every time he buys or sells a security on your behalf, may just want you to buy or sell something, or he won't get paid.
Further, Bob may be restricted by the products his employer will allow him to sell to you. Bob's employer may only let Bob sell his company’s products, even though those products may not be the best-performing, or lowest-cost investments.
Finally, in a worst-case scenario, Bob may sell you a mutual fund that generates high fees for Bob, even though there may be lower-cost ETFs available elsewhere.
Don’t mix your investment advice with other types of financial advice.
Be very careful if your advisor earns some or all of his or her compensation as a percentage of what you invest, or as a percentage of your assets.
Advisor and mutual fund fees can have a hugely negative impact on your portfolio.