As an old saying goes, often used at poker tables: "If you don't know who the sucker at the table is, then it's probably you!"
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An investment advisor writing about advisors?
That's right! Yes, I?m an investment advisor, and in this article, I?ll bring all the details about this creature that inhabits the financial market. My goal is to show you what an advisor should be, and also to reveal what, unfortunately, many are.
Who Are They?
Advisors are the commercial extension of a brokerage firm. They can be independent, working in their own offices, or employed by the brokerage itself. They act as "sellers" of financial products, acquiring clients, understanding their needs, and addressing them in the best possible way.
The Role of an Advisor
The role of an advisor is often misunderstood as "the guy who manages my money," but be cautious with this idea because it?s not entirely true. Thinking this way is like saying a psychologist is "the person who manages my thoughts." Doesn't that sound odd?
Following this analogy with psychologists, we know that no psychologist, at least the ones who follow the proper techniques, will tell you "do this" or "don't do that." Instead, they will listen carefully to what you have to say and respond in a way that makes you think about the situation. The decision to do something or not will always be yours. The psychologist's role is to help you think about what makes the most sense for your case.
Drawing a parallel between this and the investment advisor, we realize their purpose is to listen to the financial "pains" of their clients and bring options to solve them. However, under no circumstances should they make decisions for you. With this in mind, I like to think there are no good or bad investments, only investments that make sense for some and not for others. It?s always a balance between the client?s risk appetite and the investment?s return potential.
At its core, an advisor should:
- Understand your needs and present products to meet them;
- Process buy and sell orders of assets issued by their clients;
- Monitor and review the client?s investments;
- Be honest and free from conflicts of interest.
If your advisor meets all these criteria, congratulations, you have a great professional by your side!
The Conflict of Interest
Like most salespeople, the standard for advisors is to receive commissions based on the products they sell. Let me give you a simple example to draw a parallel later.
Imagine two cars, identical in brand, color, model, mileage, and price. The only difference is that one is equipped with low-quality parts and is likely to have problems, while the other is flawless. Aware of the "problematic" car?s disadvantage, the car dealership owner offers a much higher commission than for the car in perfect condition. This larger commission will motivate some salespeople to sell the car to someone who might not notice the flaws or who doesn't know enough about cars to spot the issues right away.
