Monthly Archives: May 2016

What Work Does a Financial Consultant

Financial consultants are self-employed firms or institutions which provide professional advice on financial planning and financial management. Financial consultants offer analysis and guidance to businesses and individuals in making investment decisions. They add value to an individual or individuals and family, by helping them lay out what their overall needs are and articulate their goals. Financial consultants cannot make the goals up but help the client to understand how their finances can help meet those goals. Financial consultants assess the economic performance of companies and industries for firms and institutions with money to invest.

The help may be required almost always. The advices have proven to be realistic during the years of bad markets that we had during the years 2000-2003. Before 2000, we had amazing markets and there were a lot of people investing over the internet and online and getting short-term profits. People thought that there really wasn’t a need for financial adviser or financial consultant because of how well they could do on their own. However, that period of boom ended in a big bust. The majority of clients, who followed the advices from them had a good sound financial plan, didn’t suffer during the downtrend. But those without the advice and guidance from the financial consultants had strained their finances resulting in a huge loss. While, an appropriate financial planning is a roadmap towards success, they are the one who chart this roadmap.

Why do people avoid financial consultants?

There are three practices that are prevalent, when it comes to taking financial advice of the financial consultants:

o Many people believe that only they can plan their own finances. They think that reading a few books/business magazines/newspapers, browsing through financial websites and watching some business channels are more than enough to make investment decisions.

o Even when an agent is involved, they expect him to pass some portion of the commission he or she earns.

o To hire financial consultant services by paying them fees, just as they would do for a doctor or a lawyer or an accountant etc., is practically unheard of.

It is important to appreciate the fact that the investment world is huge which comprises of shares, mutual funds, bonds, post office schemes, credit cards, home loans, insurance etc. Each investment module has its benefits, drawbacks and typical terms and conditions. It is difficult for an ordinary person to behave extraordinarily in every circumstance. In fact, even an advisor would usually specialize in some specific fields only.

Finding a Financial Consultant

If you’re frustrated from having one financial consultant after another financial consultant provide you with inadequate returns on your stock portfolio, then I hope you read my first article “Three Tips for Finding a Superior Financial Consultant.” In this article, I’ll drill down some more to really hammer home those points.

Finding a superior financial consultant, isn’t always about the financial consultant. Sometimes it is also about you. Are you willing to also make the commitments to find a superior financial consultant? In this article, I’ll discuss one more crucial behavior about financial consultants and two regarding the behavior of you, the investor.

Three more tips:

(1) Don’t hold mutual funds;

(2) Don’t be stingy if you find a superior advisor; and

(3) Be patient and ask lots of questions in your search for a superior financial consultant.

Don’t Hold Mutual Funds

Let me tell you why I’m not a fan of mutual funds. Mutual funds have so many hidden fees that it’s often difficult to know exactly what your costs are. Besides upfront costs that can be upward of 5% for some funds, there are 12b-1 advertising , marketing and distribution fees that range from 0.25% to 1.0%, administrative fees that range from 0.20% to 0.40% and of course management fees paid to the mutual fund manager of 0.50% to more than 1.0% annually. This doesn’t even include undisclosed “soft” costs of trade commissions that can add another 2.0% to 4.0% in costs. And yes you didn’t incorrectly read the first part of that last sentence. Many mutual funds charge you 12b-1 expenses they incur from advertisements and commercials that urge you to buy their funds, and if you’re buying no load funds, chances are that your 12b-1 fees are higher than average.

Add to this, intangible costs such as the performance that is sacrificed to maintain the necessary level of liquidity to satisfy share redemption, and your costs become even greater. For a fund that turns over 100% of its assets annually, Roger Edelson of the University of Pennsylvania Wharton School estimated this sacrificed performance to be 1.5% of returns annually. Lastly to add insult to injury, sometimes fund managers sell out of their biggest winners to meet liquidity needs, generating a capital gains income tax for you, the investor, even if the mutual fund lost money that year.

But this isn’t even where the negative traits of mutual funds end. If you have one of the many financial consultants that merely try to jump on the hot emerging market bandwagon by buying mutual funds in China, India, or any other country, I advise you to exercise extreme caution. When pullbacks happen in these country’s economies as will inevitably happen, you are at high risk of losing money quickly. Why? In a mutual fund, you are at the mercy of a herd mentality that more often than not, will induce panic upon the release of bad news, and cause millions of investors to redeem their shares over a short period of time. If this happens, fund prices will plummet before you even knew what hit you.

But if you choose to own just the best stocks in the best industries in these countries, most likely your stock prices will be much more insulated and less volatile in such a scenario. While these stocks may still decline, they will most likely decline a lot less than the fund will. Strong companies’ stock prices tend to weather country-wide economic downturns much better than fund prices, and if they are in the right niche, they may even continue to flourish.

Be Willing to Pay Fees for Superior Advice

Superior advice is superior because a lot of hard work and time go into producing that advice. I remember talking to a potential client one time that had a million dollars in the stock market and was adamant about not paying fees. He just wanted to pay commissions on stock trades. When he showed me his statements (by the way he was with a major Wall Street firm that I won’t name), there seemed to be no structure or investment strategy in his portfolio. He owned a mix of mutual funds and individual stocks, and many times those stocks were traded as soon as there was a nominal 5% gain in any of them. Furthermore, the statements by his financial consultants were misleading. The consultant handwrote on his statements that he was doing great because he was up 6% that quarter (which I believe just about matched the S&P 500’s performance that quarter). He told me that annualized, that the 6% translated into 24% returns.

But when I explained that his net returns would be much lower because his portfolios quarterly 100% turnover rate produced excessively high capital gains taxes that would undercut his net returns, he didn’t seem to understand. I guess his financial consultant didn’t bother explaining this small detail to him. Still, he insisted on paying no fees no matter what. I could tell that he was the type of person that was blindly loyal to his financial consultant, so I moved on without attempting to schedule a second meeting.

Superior advice costs money. And if your financial consultant is superior, he or she will be transparent about his fees and your costs, so that you won’t be confused about what your true gains really are. Don’t be stingy. After what you just learned about mutual funds, why would you not be willing to pay even upwards of 2% annually for superior individual advice and management when you’re almost certain to be paying more than that a year just to own a mutual fund?

Be Patient and Ask Lots of Questions

If you persistently ask the three questions I mentioned in part one of this article, you may get frustrated after talking to ten financial consultants, none of whom can answer those questions. My advice is to just be patient. Don’t give up and don’t settle for a salesperson that is trained to answer those questions to lead you to believe that he or she has answered your questions when that is not the case at all. What do I mean?

For example, when you start drilling down about specific stock picks, a common sales technique to avoid your question is an answer similar to the following: “I’m not a stock picker. But don’t worry. I know how to find the best money managers in the country to manage your money for you, so you’re in great hands.” Don’t be misled by smokescreens like this. Remember that if your financial consultant truly understands how to find you the best money managers, then he or she must necessarily have discussions about geographical preferences, industry preferences, and specific stocks with those money managers. How can a financial consultant claim to select the best money managers for you but have no understanding of what stocks you own and what makes those stocks special?

To summarize, buy individual stocks over mutual funds, be willing to pay fees for an exceptional advisory if you are so lucky as to find one, and remember, the luckiness of finding an exceptional advisor is not really luckiness at all. It comes from your hard work, tough questions, and your unwillingness to be led astray by the professional smoke screens of financial consultants

Selecting a Financial Consultant

In your efforts to manage your money and plan for financial security, are you sometimes persuaded to buy a product or engage a consultant’s services on the basis of claims such as:

“This is the best financial product in the whole industry.”
“We are the best financial services company.”
“I am the best Financial Consultant in the business.”

Such statements are not uncommon in the financial services industry, so how do you decide who to trust or which financial institution to place your business with? You will be grappling with this issue when you graduate and start planning your finances or perhaps even now as you take stock of your retirement pans.

Let us look at these common statements to get a clearer picture of what is truth or myth:


There is no one-size-fits-all product in the market. What is suitable for one person may be unsuitable for another. A professional Financial Consultant should gather information about your financial needs and status before making any recommendation. You would expect your doctor to prescribe medication only after he has made a diagnosis, so have the same expectations of your financial consultant.

Ask your consultant: “On what basis is this recommendation suitable for me?”


Awards do give an indication on a Financial Consultant’s performance. However, do keep in mind that awards are mainly measured by sales performance. Just as a fast food chain that sells the most burgers may not have the best cooks, a Financial Consultant who has achieved a high sales performance may not necessarily be the most suitable person for you.

Ask your consultant: “How did you qualify for the awards?”


Reputation and branding matter but the key question is how much emphasis you should place on them. Different financial services companies claim to be the best, so which is really the best? Well, they could all be the best and that depends on the basis of your measurement, for example, new business sales or assets under management. Just like a hospital that has the most number of patients does not mean the doctor that you are seeing is the best.

Ask your consultant: “Best in what area?”


That would be possible only if a Financial Consultant can have access to all financial products from all financial institutions and the financial products can be easily compared to one another. Unfortunately, like the theory of perfect competition in Economics, this could prove elusive in the real world. Major financial services companies still use their own pool of Financial Consultants as the only distribution channel for most of their products. In addition, competing financial products usually have different pros and cons. Make sure the financial product recommended is the best suited for you and not the one that is best for the Financial Consultant in terms of remuneration.

Ask your consultant: “How are you remunerated for the different options listed in your recommendations?”

When you come across these statements, make sure you ask the consultant to back them up. A good financial consultant will help you make investment decisions that are appropriate for your needs, and these change according to what stage of your life you are at.

Consider Before Hiring a Financial Consultant



Many companies will, throughout the life of their business, realise that need to hire financial help. This can be right at the start of setting up in business because of the need to have a solid financial plan, or further down the line due to the growth of the company or unexpected financial problems.

Thankfully, there are a huge number of options available on the market today for any company that finds themselves in any of the above situations. These can range from adding full-time specialist staff to their business or hiring a consultant, to seeking free advice from local authorities or investing in services from large financial advisory firms.

For many reasons, including cost and practicality, a popular choice among companies today is hiring independent consultants or consultancy firms to meet any financial advisory needs. However, there are several things to consider during the hiring process to make sure that a company gets the results they want.

The first thing that any company should ask is what licences, certifications and credentials a financial advisory consultant has. There are several different types of financial advisors, including the Certified Financial Planner (CFP), the Chartered Financial Consultant (ChFC), Registered Investment Advisor (RIA) and the Certified Public Account (CPA).

Each of these credentials is particularly suited to different types and sizes of business, so a company needs to do their research on which certification is best for their specific needs. Similarly, anyone wished to hire a consultant specialising in financial advisory needs to inform themselves about the specific services provided.

As well as learning exactly what services a consultant can deliver, it is important to know what they cannot provide to their client companies. A business that knows its needs in detail before searching for a financial advisory consultant is therefore more likely to find the ideal candidate and service much quicker.

Another important consideration for companies looking to hire an expert in financial advisory is considering the niche area of the consultant they are considering. If the company has particular values, such as social responsibility, a like-minded advisor with considerable experience in this area is more likely to be a good match.

Companies can also ask to see a sample financial plan from the consultant or consultancy firm they are looking at. As each expert in financial advisory has a different way of working, seeing a sample plan will allow a snapshot of what the reality of working with them can do for a business.

To give a specific example, some financial advisory consultants will provide very detailed financial plans, whilst others will provide a simplified and more easy-to-understand summary of key areas to focus on. Either of these may meet the demands of a business, or they may not. In the latter instance, a company will know to look elsewhere for a consultant more suited to them.

Last of all, a company should check whether they will be working with an individual or a team of consultants. Even though one of these options is not intrinsically better than the other, many companies will have preferences in the way of working in their business.

Working with a financial advisory team from a consultancy firm can bring benefits in the way of always being able to be in touch with expert help if it is needed, especially in urgent situations. On the other hand, working with an individual consultant can allow a more intimately knowledgeable relationship to build up between them and the company.

These are just a few of the important questions that companies should be asking when they are looking to invest in financial advisory services from an individual consultant or a consultancy firm.By evaluating their own specific needs and preferences for a way of working first, they can find a perfect match and the ideal financial solutions they require more rapidly.