7 July 2008 1230 views 2 Comments Print This Post  Email This Post

The following is a guest post from Aaron Stroud at On Financial Success

Financial matters have a reputation for being complicated. Ill-deserved or not, financial success requires that we consistently make the right choices. Unless you’re content to settle for water cooler advice or willing to do the research, you’ll need to know how to find reliable financial advice.

Many people rely on media gatekeepers and financial “advisors” for help. But the media specializes in selling advertising and many financial advisors are simply salesmen, not investing experts.

And while most of us think we’re savvy enough to avoid promises of high returns with little risk, fast paths to wealth, and strategies for beating the market, the line between scam and savvy investing is often blurred.

Here’s three tips for finding a reliable financial advisor.

First, avoid everyone who promotes a strategy for beating the stock market. Millions are spent every year feeding this myth because hundreds of millions are made off the people who fall for it.

Even if a winning strategy did exist, it wouldn’t work for long. Once someone exploited it, others would be quick to imitate.

Second, decide how you want to compensate your financial advisor. Some advisors charge a percentage of your invested assets, others charge a flat fee. Stay away from any “advisors” who are not willing to disclose their compensation.

Many of these financial advisors put their interests first—pushing expensive, poor performing mutual funds for the large commission. In return, investors get to look forward to low returns as the investment company pockets excessive fees year after year.

Third, make sure your financial advisor crafts asset allocation plans built around low-cost index mutual funds.

Smart investors use index funds for their lower expenses and higher returns. The superior returns are achieved by approximating the stock market’s return rather than attempting to beat it.

Approximating the market’s return might not sound like much of an accomplishment, but every year more than 70% of mutual funds fail to do just that. This percentage only rises when two or more years are considered.

Although making the right financial decisions can be complicated, these three tips will help you avoid the majority of financial salesmen out there. And if you enjoy following the financial media, keep watching. Just remember that most of it is entertainment, not a resource for outsmarting other investors.

Aaron Stroud shares reliable, easily followed steps to build wealth at On Financial Success. Subscribe to his feed to follow along or ask a question to direct the conversation.