Starting your Financial Journey

“The journey of a thousand miles begins with one step” – Lao Tzu, Chinese sage

You know, a great sage once said, “the journey of a thousand miles begins with one step” and this means that all endeavors, be they long and arduous, have a starting point. We very much agree with this view especially in the highly complex world of Finance with its myriad of products services that can even overwhelm the “pros”.

That said, you might ask, “Ok, so how do I go about it then?”

Well, much like a lot of things, you don’t need to reinvent the wheel. You just need to start working with someone, a real professional, a licensed (very important detail) “financial advisor”. This is very much like consulting with a doctor for medical advice or asking a lawyer for legal advice.

We wouldn’t want to just go in completely blind right? Especially when you’re faced with an alphabet soup of products from VUL (Variable Universal Life Insurance) to UITFs (Unit Investment Trust Funds) or even ETFs (Exchange Traded Funds) and this is only just talking about pooled investments not individual stocks or other financial products like mortgages etc.

You get the picture, but before we talk about picking a financial advisor, let’s define it as simple as possible.

A Financial Advisor is someone who gives advise (well, duh) on how to save, invest and manage your money while factoring in your goals (like buying a car or a house) and personal circumstances like your profession or amount of savings.

Thus, they take a more comprehensive look than just someone hawking financial products like an Insurance/Mutual Fund salesperson. They may also specialize in areas such as retirement or estate planning (passing on inheritance) or even behavioral financial planning which is about factoring in psychology. There are also some who are into a more generalized practice.

With that out of the way, let’s look at how you pick one. Generally, you can split advisors into two types:
1. Commission/Fee-Based
2. Fee-only

Commission-based advisors generally sell products such as Mutual Funds (check if they are Certified Investment Solicitors) or Insurance (they’re regulated by the Insurance Commission). Some also sell individual securities such as stocks or bonds that aren’t part of “packaged product” and make sure they’re Certified Securities Representatives (stockbrokers) or Certified Fixed Income Salesman (for bonds).

Don’t forget though that, despite the licenses, they are “product salespeople” and they only earn money when they make a sale. So, why the emphasis on how they earn? We believe this is highly relevant as it defines your relationship and yes, there are some advisors that do really believe in the product they sell, and some actually consider your well-being but never forget the inherent conflict of interest.

There are cases where this type of financial advisor might not pay as much attention to an existing client (where they may not earn commissions) as compared to a new prospect where they could make a sale and bag a commission.

Furthermore, the inconsistent income here and quotas might mean a high turnover rate and the “financial advisor” may shift jobs and “orphan” you mid-journey. You can pretty much imagine many horror stories of people saying that their Insurance salesperson disappeared or abandoned them.

That’s why we turn our attention to the second one, the Fee-only type. The Fee-only type advisor is often a veteran in the industry and probably served their tenure as a commission-based salesperson but realized the conflict of interest from pushing a product or just wants to prioritize the needs of a client first.

This type of advisor earns their keep from providing counsel much like a lawyer or doctor where you pay an hourly fee for advice or, in some cases, a percentage of your assets that they manage. This type of advisor usually runs their own independent practice and often have credentials like Registered Financial Planner or Certified Financial Consultant.

Since they run a business, it’s unlikely that they will change jobs in a heartbeat and may in fact stay with you for your entire financial journey. The conflict of interest is also reduced, since your long-term success will benefit them as a source of recurring fee income and that they don’t have to continually make a sale to earn a living.

Though, bear in mind that just because they have the credential or passed an exam may still mean that they come up short on skills and credibility. So, we believe it pays to be careful in choosing the right advisor.

However, considering the in-depth level of questioning needed, we’ll reserve the process on selecting an advisor in a future article though a good resource in the meantime is The National Association of Personal Financial Advisors where they give some tips on doing a diagnostic or even a checklist on a prospective advisor. Though it’s US-centric, we don’t really have an accessible resource here in the Philippines (for now!).

And there you have it! Starting your financial journey should involve finding a Financial Advisor that can be with you every step of the way while having your interests aligned.

Next week, you’ll be hearing (or rather, reading) from a different point of view and that’s Francis Louigi Cañizares, our main speaker for the Basic Technical Analysis course, and he’ll be walking you through the myths and misconceptions people often have in investing in the stock market.

Till next time!

Disclaimer: We want to remind you, dear reader, that the content in this column is my opinion and AlphaEdge Research’s opinion only and should not be construed as investment advice because we’re not your financial adviser nor have we taken into consideration your personal objectives, financial situation, needs or circumstances as your fiduciary. This column is mainly for your entertainment and education only.

Tags: AlphaEdge Research, Personal Finance, Getting Started, Beginners