A few months ago, we wrote an article on reasons why you can’t trust your financial advisors.Thus we decides the also write on 5 signs you can trust your financial advisor. Although there is a general truth in what we said; not all are bad eggs. There are financial advisors who care for their customers’ financial health (not many) and will give realistic, transparent and honest advice.
1 Your goals take priority over his commission
Financial advisors won’t waste time advising a potential client if he cannot make money. His commissions are usually built into the product pricing. An honest financial advisor is willing to recommend products that are suitable for you without pushing those that pay him the highest commissions. One clear sign is he recommends you a term life insurance to a whole life policy. His compensation can be significantly lower.
2 The advisor talks openly about the risks
When you tell your advisor you want to invest in certain higher risks equity or junk bond funds, your advisor didn’t immediately start to push products in those categories. Instead, he starts to explain the related risks and questions whether you have the financial ability to absorb the potential losses. This is a clear sign that the advisor is concern about your financial health than selling you risky products that aren’t suitable. Note that the riskier the products are, his commissions are usually higher.
3 Make known that you can lose money in investments
When you are comfortable investing in a unit trust and about to sign up; your advisor suddenly brings up that the future returns on the investments are not in anyway correlated to its historical returns. In other words, he makes clear that the returns may be higher, lower or even go into losses. He is being responsible, as he wants you to know that no matter how good the past performance was, you still have a chance to lose money. The investor (yourself) has to understand the risks and assess whether he can afford the potential losses.
4 Discloses his compensation openly without you asking
We understand that most financial advisors live off commissions. Therefore they have to sell to make a living. However, a trustworthy advisor is open about his compensation without you asking. Other signs are that he does not keep pushing products to you but instead find out your goals, then recommend a simple, low-cost product that suits your needs and is transparent about his cut.
5 He meets up with you regularly but never tries to “churn” you
Many financial advisors ask to meet up to review your financial health. After going through some basic questions, they say your current life insurance policies are no longer suitable because your goals and financial standings have changed. They then encouraged you to surrender your current policies and buy new ones that are suitable. This process is well-known as “churning” because an advisor stands to gain up to 50% of the customers’ first-year premium.
A good advisor that cares for your long-term financial health will almost never ask you to surrender any policies as it is likely to result in losses (unless you have held it for a very long period).
Do use this checklist when you have your next appointment with your financial advisor. Hopefully, you can pick up one or two of the signs. Don’t feel pressured to sign quickly. Take your time when you decide on future financial products. It is worth it.