How To Be A Wise Financial Consumer

Let’s start with a question. Do you agree with this statement? People, in general, are more often SOLD goods and services rather than BEING A THOUGHTFUL CONSUMER.

In today’s US economy, goods and services are largely made up of layers of sales processes. The further removed from the original source, the more layers and fees become involved. If you purchase a used car directly from the person selling it, you will likely get the best deal because the seller doesn’t have to pay any commissions or have a facility to maintain. If the owner of the car has a dealership that has to pay a salesperson a commission, hire a staff, pay for benefits, and maintain a building to keep their business operating, they have to increase the cost to cover these expenses.

This is also true with financial products. Purchasing an individual stock directly from a company, possibly through an employee stock purchase plan or a discount brokerage firm can be very inexpensive. If you decide to buy the same stock through a financial advisor, you would likely have to pay a commission or advisory fee, which would increase the cost and potentially decrease your profits.

Likewise, utilizing mutual funds or managed portfolios as a way to purchase your investments would create another layer. The manager and managing firm would need to add expenses to cover the costs of salaries, marketing and infrastructure. There are other investment products too, such as annuities or life insurance, with layers of fees and expenses that can be hard to understand and impact the performance of the underlying investments.

I want to point out that hiring a financial advisor or using an investment product such as a mutual fund, an annuity or a managed portfolio is not wrong by any means. These are all ways for an investor to reach their financial goals, but it is important that these are purchased THOUGHTFULLY. Ultimately, there must be VALUE in the product and relationship. Just like any other product or service you would purchase, you should be confident that the benefits outweigh the costs. Value can come from outperformance, time savings, specific expertise, hard-to-access products and many other ways.

Here are some guidelines you can use to be a THOUGHTFUL CONSUMER of financial products:

1. Purchase products for a purpose. Every investment should fit into your overall financial plan and be earmarked toward a purpose. Your objective for short-term goals might be to keep your money liquid and safe, but your long-term objective can be growth. Some people purchase products they would consider speculative and are willing to take the risk to potentially get superior returns, but these should be left to assets you can afford to do without.

2. Seek transparency. Inquiring about commissions and conflicts of interest is absolutely appropriate. Don’t be afraid to ask about the total costs of the product or service being discussed and how the investment is going to overcome these expenses. Ask if the product is proprietary and if there are any quotas associated with it.

3. Measure performance. Ask about how the investment or portfolio will be evaluated. Some advisors use benchmarks to compare to, while others use a person’s financial goals as a measurement. You should evaluate your investments at least annually while keeping your long-term goals in mind. Be aware of how fees and expenses are impacting your investment performance.

4. Consider other alternatives to this product. Compare the product offer to other suitable offerings. This is part of being a thoughtful consumer. If an advisor only offers one solution to your needs, inquire about alternative ways to meet it.

5. Seek to understand. Do not purchase any product if you don’t completely understand the risks, rewards, costs and penalties. One of the biggest regrets investors have is the purchase of a product, possibly from a friend or acquaintance, for which they can’t explain how it works or how it fits into their plan. Often, these products are difficult or expensive to unwind.

6. Finally, look for someone you can trust. While it can be hard to measure this, you should never partner with someone who you don’t inherently trust. At the very least, any advisor should prioritize your best interests before their own desire to make money from you.

Seeking guidance and advice for your investments is prudent and wise, but keep in mind that if any investment goes south, the consequences are most likely going to be felt by you, the investor.