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Where to Get Financial Advice – the Good and Bad

September 30th, 2020 | 4 min. read

By Jacob Schroeder

where to get financial advice

Ask a friend or relative how much money they make, you’re likely met with silence. But ask for an investment tip and seemingly everyone opens right up – for better or worse.

At least according to the Federal Reserve’s Survey of Consumer Finances, which found people most often turn to friends, relatives and associates for investing information.

That could be a costly mistake.

A Harvard University study suggests the people we surround ourselves with directly shape our attitudes and habits – both good and bad.

It follows then, your financial habits depend on where and from whom you get financial information. Your wealth may be reflected in the company you keep.

What if your friends like to spend lavishly? Or, what if your family is extremely frugal and risk averse?

You could be following financial advice that is not in your best interest. And if you turn to the Wild West that is the internet, maybe even worse.

In a time when vetting information is more important than ever, let’s go over the good and bad of some of the most common places people turn for financial advice.

Friends, relatives or associates

GOOD: Among the people you know, you can expect a sympathetic ear and the comfort to speak freely. Most are probably not interested in selling you on something. Therefore, you can reasonably assume they have your best interest at heart. And when they can’t help, they may be able to refer you to someone who can.

BAD: If a friend has information that they believe is valuable (such as a hot stock tip), as your friend they will likely want to share it with you. But unless you’re friends with the likes of Warren Buffett, take any unsolicited advice with a grain of salt. Even if Mr. Buffett is your BFF, what he tells you may not necessarily be appropriate for your situation.

Your feelings toward someone should never hinder your due diligence. Many victims of Bernie Madoff were referred to him as a trustworthy person.

Wanting the best for you doesn’t guarantee good financial advice. Bad money advice though can almost guarantee the end of a good relationship.

THE BOTTOM LINE: There is nothing wrong with talking money with friends, family or associates. However, just because you love or trust them, doesn’t make their financial advice right for you.

Media, Books & Online

GOOD: Do-it-yourself investors generally turn to the media, books and online resources for financial advice. Respected publications like the Wall Street Journal and Barron’s, among others, have skilled reporters who provide financial information backed by research. Classic books, such as The Millionaire Next Door and The Richest Man in Babylon, offer timeless financial advice. Online, a variety of helpful blogs and forums bring people together to exchange money tips, rules and strategies.

Altogether, there is a wealth of finance information all at your fingertips – for little or no cost.

BAD: The large volume of information in itself is often a problem. It can be challenging to sift through it all to determine what applies to your specific situation.

More troublesome, the bad info tends to outweigh the good. Research has shown the internet -- social media in particular -- can perpetuate our own biases, making us more vulnerable to misinformation.

And don’t think you can take what you read online to the bank – even from the “experts.”

Every year, the biggest names in investing gather at the Ira Sohn Conference in New York to openly share their latest stock picks to help raise money for charity. As a little experiment, a team of Wall Street Journal reporters tracked those recommended stocks and found “investors would have been better off picking companies by throwing darts at stock tables than listening to Wall Street’s geniuses.”

THE BOTTOM LINE: You can manage your own financial life and investments based on information you read in the news and online. But is it credible? Anyone who wants to be a DIY investor must thoroughly research their sources and consider different viewpoints.

The bigger questions are: Will you actually put your plan into motion? And will you have the discipline to stick with it?

Seminars, mailings and sales pitches

GOOD: Free information from finance professionals, what’s not to like? In a meeting or seminar setting, you may have the opportunity to ask questions, and may come away with a better understanding of your finances and insight into how finance professionals can help.

BAD: Again, what’s not to like? Well, free information is free for a reason. Generally, the hope is to sell you a financial product or service. That doesn’t mean the information is inherently bad. You just need a healthy dose of skepticism.

At worst, these tactics are used to charm and take advantage of you. In a study published by the National Bureau of Economic Research, researchers posed as potential investors at sales pitches with primarily brokers and commission-based financial advisers. These brokers typically recommended higher fee investments that ran counter to the “potential investors’” best interests but aligned with the brokers’ financial incentives.

THE BOTTOM LINE: At best, you may get a professional perspective of your finances or investments; at worst, you may get pressured sales tactics. A good rule of thumb: the more pressure is applied to sign or buy, the faster you should run the other way.

Financial advisers, planners and other professionals

GOOD: Financial advisers have the expertise and experience to provide advice that is related to your specific needs. With that comes a financial plan that details actionable steps toward your personal financial goals. Along the way, you receive guidance whenever problems arise or your life changes.

That builds confidence and clarity. According to Northwestern Mutual’s Planning & Progress Study, more than half of those with a financial adviser feel very financially secure, while 21% without an adviser said the same.

BAD: Professional guidance, of course, comes at a cost. Advisory fees vary from adviser to adviser, with total costs based on the types of services provided, what investments are recommended, and how an adviser is compensated, either as a percentage of assets or hourly rate.

Further, not all financial advisers are the same. Not all advisers are legally obligated to act in your best as a fiduciary, as many investors wrongly assume. All of which means you need to shop around.

THE BOTTOM LINE: A financial adviser can help significantly increase the chances of achieving your financial goals. But finding a financial adviser that is right for you is not effortless. It is prudent to interview a few before becoming a client. Three questions that will help: Are you fiduciary? What are your credentials? What are your total costs?

Where you get financial advice is one thing you can control as an investor. Listen only to those who have financial credentials and truly have your best interest in mind.

As Stoic philosopher Epictetus said:

“The key is to keep company only with people who uplift you, whose presence calls forth your best.”