Financial advisors have historically played an important role in the financial planning industry. In the United States alone, there are hundreds of thousands of financial planners and advisors, each with varying specializations, experience, and portfolio preferences.
Many people like to work with financial advisors because, at least on the surface, these individuals seem to know quite a bit about finance. They offer you advice, help you pick assets to invest in, and answer the many questions you might have.
Unfortunately, however, many financial advisors will recommend investments that are in their best interests rather than your best interests. They may even discourage you from investing in lucrative, sound investments such as private placements because investing in such vehicles would yield them zero commissions.
Understanding how your financial advisor gets paid can help you recognize any biases that may be at play. If you met your financial advisor through a life insurance agency, for example, there is no doubt that they will sway you into investing in life insurance. This is not to say that all life insurance policies are necessarily bad, rather, that the recommendation was simply made with a strong degree of self-interest.
These direct conflicts of interest can create problems for unknowing investors. Below, we’ll discuss some of the things financial advisors don’t want you to know and explain why lucrative private placement opportunities are often overlooked and avoided.
Follow the Money
In the world of finance, nothing is free. Even if someone is offering you free information or a free consultation, they are likely only doing so to potentially sell you a product or service someday in the future. If you are working with a financial advisor, be sure to ask them how they get paid.
If you aren’t inclined to ask, I’ll just tell you. Financial advisors get paid in many different ways. Some get paid hourly, others get paid by commission, and some even get paid for the specific products they sell. They still get paid, even if you don’t. Think about that. If someone’s livelihood depends on their ability to recommend one product over an alternative, it’s pretty easy to guess what they are most likely to recommend. If their interests aren’t aligned with yours, then self-interest creeps in.
We’re certainly not suggesting that traditional financial advisors are malicious in any way, however, when interests are not aligned, things tend to go awry. This misalignment of interests is an industry-wide problem and is not something that should readily be dismissed or overlooked.
Yours or Mine
It’s obvious that many financial advisors, particularly those that work for a specific company within some facet of the financial industry can be easily pressured to push specific financial products even when it’s not the best investment for you.
But what many people don’t realize is that there may also be active forces preventing them from making specific recommendations. For example, investment vehicles that are often kept out of sight and out of mind are private placements. These assets can offer extraordinary returns for you, so what’s the problem? The problem is financial advisors make no commissions if you invest in private placements, so where is their incentive to encourage you to invest in these types of investments?
In fact, many financial advisors will actively speak out against private placement investments without ever clearly stating why. They might say they prefer more traditional ways to access global equity markets or blame illiquidity, but those reasons alone are insufficient to dissuade you from investing in some of the most lucrative and consistent investments available.
What they aren’t telling you is the main reason they make their specific recommendations: it is good for them, personally.
When you ask a financial advisor, “Why do you recommend this specific investment?” they’ll probably say something about expected returns, or diversification, or various other factors that can make a prospective investment appealing.
All of these things may be true. After all, they are well-aware of the game that they need to meet your baseline expectations if they want to continue working as your advisor into the future. However, more times than not, financial advisors are financially illiterate. Let me explain.
They may know their products because it’s their job to know, and it’s how they get paid. But how many financial advisors are well-versed in real estate investing? Not REITs, but actually owning real estate directly. How many know about private equity, real estate syndications, cryptocurrencies, or running a business? Not many.
It is still okay to listen to your financial advisor and they probably have some decent advice. But, at the end of the day, take the advice with a grain of salt, because you now know that they have underlying self-interests. Know that you are ultimately the one who has control over your portfolio and will be responsible for the outcome of your investing decisions. You will always be free to move your capital elsewhere if your advisor prohibits you from exploring a particular asset class you are interested in. Take control, your future depends on it.
Here are some additional insights from actual financial experts.
Financial Advisors Fear Losing Control
Most financial advisors have worked hard to be where they are and, like anyone, they do not want to be made obsolete. However, you can find profitable investment opportunities on your own. You can make investments and generate sizable returns without the need to pay someone a commission every time you want to make a trade or move funds.
Financial advisors are often hesitant to make that clear – that is, that they fear the veil will be lifted and that their profit-generating services will no longer be needed. The clout they’ve worked hard to establish can easily go away. You can take control of your own future and do a good job at it.
These financial advisors may be experienced, but they don’t know anything you can’t learn (rather quickly) on your own. For instance, if you find a private placement, such as a real estate syndication, that on a risk-adjusted basis appears to be an incredible opportunity, educate yourself and take action. Invest as the ultra-wealthy have for decades.
While financial advisors are not going away any time soon, their roles will continue to change. Today, the consumer investor are the ones who rightly have the power to control their own destiny. If this means investing in private placements or other alternative wealth-building vehicles, now more than ever, you are empowered to do it.
About the Author
Seth Bradley is a real estate entrepreneur and expert at creating passive income while still working as a highly paid professional. He’s the managing partner of Law Capital Partners, a private equity firm focused on multifamily and opportunistic acquisitions, and the host of the Passive Income Attorney Podcast. Get started building a future full of freedom by snagging The Billables to Abundance Bible at www.escapethebillable.com.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.