“There is No Chance I’m Wrong” – How to Identify an Untrustworthy Financial Advisor

 If you ever hear that phrase or see it in a blog talking about investing, your best bet is to run or x out the window. If you do not you are falling for the swindlers and hustlers whose principle money making scheme is selling you information, not their own investing.

This article was inspired by the video “The Preservation of Elephants” (PODCAST) by AirelonTrading. I know it’s long (34 minutes) but if you don’t listen to Dan of NoNonSenseTrading you are really missing out on a gem of financial markets commentary.

The man is a full time trader and investor with the experience and sense of humor to make his podcast and videos worth watching.

No One is Ever 100% Correct on Investing

Believe it or not, not everyone gets it right all the time. If that were true this world would be a very different place. If that were the case, everyone practicing charts and technical analysis would always be right. Even the greats like Warren Buffet have made some stellar mistakes in their day.

So why do financial advisers and professional investors alike, like to brag about always beating the market? Quite simply, there is a lot of money to be made from just beating the market one year. To randomly achieve a percentage point higher than the average is likely to garner new interest and new investors.

Rick Ferri over at Forbes reminds us, most mutual fund managers, with arguably the most information and deepest wallets, still fail to beat the market average. So what confidence does that give us in financial advisers?

How Financial Advisers Scam People into Thinking They’re Stock Picking Geniuses

The beautiful thing about being involved in the financial markets is that everything is binary. Thus, whatever a given stock does it can only go one of two ways, up or down. Contrast this with another discipline such as politics where grey areas do exist and you find that an adviser is either right or wrong.

As a result of being binary, advisers can easily confuse luck with skill. Although skill can certainly exist, luck may override. For more on this, check out The Role of Luck in Investing.

In addition the adviser can compare and contrast performance against any other measurable metric in the financial markets to make things appear better than they are. For example, if a selection does not beat the S&P500, they may choose to match it up against the NASDAQ. Even if it does outperform the S&P500, what if that average returned below average results?

What a financial Adviser is Actually Supposed to Do

Believe it or not, the best financial adviser is not going to sell you information on the best stocks to buy or the hottest mutual funds this year. Those that do are looking only for commissions and hopefully referrals. A great financial adviser should be telling you what not to do.

The adviser is there to caution you and warn you about where your money currently is and where it is likely going based on your individual financial situation. They shouldn’t be recommended home run stocks, because one persons home run is another persons wasteland.

An example of a great financial adviser: You have a  401(k) plan through the company you work for and contribute a nice healthy amount but, you do not own any other assets, except in your company. Your adviser will explain to you that you may be investing more on emotion than anything else. They will explain to you the level of risk you maintain in owning just one stock. They will recommend you to diversify to some degree. They will offer some examples that fit according to your goals, financial status and timeline.

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