Why You Shouldn’t Trust Your Financial Advisor

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Almost every real estate investor I know has read ‘Rich Dad Poor Dad’ at some point in their life. It’s a classic, and for many of us, it helped us think about wealth, assets/liabilities, and investing in a completely different light. Another well-known, but maybe not as widely read book, is ‘The Richest Man in Babylon’ by George S. Clason. Originally published in 1926, it’s a set of parables told by a fictional character named Arkad, a poor scribe who becomes, you guessed it, The Richest Man in Babylon. It’s an inspiring read and contains timeless wealth-building principles.

One of which is:

Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.

The modern version of that statement would be something to the effect of “Invest your money with people who have demonstrated wisdom and competence with their own money.”

I was at the gym the other day, and there was a personal training session going on while I was going through my workout routine. What was particularly intriguing to me about this session was that the personal trainer, who was ostensibly there to teach the trainee how to become healthier, stronger, and get in the best shape possible, was significantly overweight. It was abundantly clear that this “trainer” had not achieved a level of mastery in health or fitness. I hope you can appreciate the irony and absurdity of the situation. Many of us may chuckle at this and think, “I would never hire someone like that to be my personal trainer.”

We all entrust aspects of ourselves and our lives to the care of others. We send our children to school, where we trust that a competent teacher will educate them well. We go to a doctor or specialist because we trust they will provide us with actionable insights on how to be healthier and overcome whatever illness or issue we may be facing. We take our vehicle to the mechanic, we hire an electrician to install recessed lights, we consult a recipe book from a famous chef, etc.

However, many people do not apply this same standard of care and due diligence to selecting their financial advisor, who they are effectively entrusting with their financial future.

Did you know that:

To be a registered financial advisor, one only needs to have a net worth of $35,000. If they’re not handling client funds, they only need a net worth of $10,000. But if they can’t meet either of those requirements, they can just post a surety bond. How many people do you imagine, when they sign up with Edward Jones, Fidelity, or Dave down the street, ask to see a personal financial statement or some sort of proof that they have a proven ability to build wealth. Seems like a perfectly reasonable question.

The typical financial advisor will advise against investing in real estate because it’s “too risky”?

The typical financial advisor is incentivized to advise you to invest in certain financial products where they earn a commission. What’s best for them usually isn’t what’s best for you.

Many large brokerages and investment advisory firms pump millions into marketing, leading many to believe that entrusting a financial advisor with their hard-earned money and financial future is the only logical thing to do. I’ve had myriad conversations with friends, acquaintances, and airplane seatmates over the years, who are intrigued by investing in real estate, and have expressed a real desire to invest either actively or passively, only to be told by their financial advisor that it’s too risky, and they’re better off just sticking with their advisor’s advice.

When I have a call with a new investor, a very common question is some variation of, “Tell me about the managing partners… their background, track record, what they did previously, how they’re thinking about the current market environment.” And “Do the managing partners invest their own money, or do they have skin in the game?” AKA, do they believe in this investment opportunity.

One of the things that drew me to PassiveInvesting.com was that the managing partners and employees know what they’re doing. They know how to build wealth. They know how to manage risk. They know how to underwrite a deal. They know how to scale a business, read a financial statement, and execute a value-add strategy. They’ve done it and they’re doing it.

So, maybe it’s time for some of you to have what may be an awkward call/meeting with your financial advisor.

Here are some fun conversation starters:

Are you a fiduciary?

What’s your net worth?

Are you invested in the financial products you recommend to me?

How are you compensated?

Why specifically do you believe that real estate is a risky investment?

You wouldn’t hire an out-of-shape personal trainer or let someone whose illiterate educate your child… don’t let someone who isn’t wealthy and isn’t acting in your best interest manage your money.