This article is an excerpt from the Shortform book guide to "The Intelligent Investor" by Benjamin Graham. Shortform has the world's best summaries and analyses of books you should be reading.
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Do you want to know how to find a financial advisor? What kind of advisor do you need and what factors should you consider?
Figuring out how to find a financial advisor can be a challenge. You have to consider your needs as well as the different types of financial advisors. There are many financial advisors out there, and knowing how to find a financial advisor that’s right for you can make a huge difference in your business and investments.
Keep reading to find out how to find a financial advisor.
General Advice on How to Find a Financial Advisor
Now that you know how much effort it takes to earn above-average returns, and how few people successfully do it, you should be skeptical of anyone who promises to do this for you. When finding financial advisors, have grounded expectations for what they should do for you. So are there ways to learn how to find a financial advisor?
- If you owned a business, you could find consultants for specific aspects of the business (such as marketing or legal compliance), but you should not expect to find a consultant to do the main work of building a profitable business. That is the business owner’s concern and responsibility.
- Likewise, you should not hire an advisor with the expectation that she can make you outlandish amounts of money without your involvement.
What distinguishes good advisors from bad advisors?
- Good financial advisors are scrupulous and don’t overpromise. When you communicate your goals and the type of help you’re looking for, they customize what they do for you. Your interests are aligned—they see your financial success as their success.
- Bad financial advisors seek to pad their own pockets, regardless of what happens to you. They prey on your greed and impulsiveness and will try to override your best judgment. Their incentives may overlap minorly with yours or even be in direct opposition.
Do you actually need an advisor? Graham doesn’t advise much on this, but Zweig suggests that you should seek an advisor in these cases when considering how to find a financial advisor:
- If you habitually underperform the market
- If your personal finance budget is out of control—you can’t pay your bills, and you don’t save any money
- If you experience any major changes or crises, such as leaving steady employment or being unable to plan for college tuition or retirement
Defensive and aggressive investors should look for different things from investors.
- Defensive investors should find advisors who will help them achieve average market returns—no better, and no worse. Typically, advisors help defensive investors by protecting them against themselves and the worst of their own psychology.
- Aggressive investors should find advisors who will be useful sounding boards for their investment ideas. Aggressive investors should examine the advice they receive and form their own conclusions, rather than simply taking opinions on faith.
Beware of these common pitfalls when seeking advisors:
- Don’t rely on advisors to make above-average returns for you without your involvement. Finding advisors who can do this is as difficult as finding individual stocks that will outperform. Before hiring someone who can achieve this, you should be able to independently assess the validity of their recommendations, which means you have already become an aggressive investor.
- Don’t hire advisors simply to have someone to blame for your own mistakes. Some speculators make up their mind on what they want to do and hire an advisor to approve their decisions; when these go poorly, they blame the advisors instead of themselves.
- In his commentary, Zweig cautions against advisors who use these red flags in their speech:
- Guarantees: “It’s a sure thing.” “You can’t lose.” “There’s no downside.”
- Overpromises: “We can beat the market.” “You’ll retire early.”
- Secrets only they have: “Our proprietary system.” “No one else can do this.” “Exclusive.”
- Unfamiliar jargon they aren’t willing to explain: “Commodities trading.” “Options strategy.”
- Urgency: “You have to act now.” “Opportunity of a lifetime.” “Once-in-a-decade.”
Now that you know how to find a financial advisor, you can choose one that works for you and your financial needs.
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- How you can use aggressive or defensive investing strategies
