Where Sophistication Meets Education

I have heard it said before that the only way to separate yourself as an advisor is by building a strong brand and providing good service. There might be some truth to that concept since personal service has become increasingly rare; but I would also contend that there is a third and more important quality – being a teacher.

If there is one thing that the financial community is really good at, it’s making topics confusing and unapproachable. Some things are naturally complicated and potentially difficult to understand, but not all topics have to be complicated! In fact, I tell my clients that they should only invest in products they understand. That might seem a little absolute and conservative but I think the results are powerful.

When you understand how something works you can see all sides of the transaction. You can evaluate the risks and adequately compare those to the potential rewards. Making an informed decision boils down to being able to think critically about the potential outcomes of your actions. I say use the "Could I explain this to my mother" rule!

Investors run into trouble when they get talked into investing in a "sophisticated" product that they don't understand. The investor might feel like they understand the product right after a sales consultation. However, I advise that instead of buying right away; they sleep on it and then try to explain the investment to their mother the next day. If you cannot describe what you are about to buy... some red flags should be going up. Unfortunately, in too many scenarios the investor does not take this advice and the end result is an unhappy client and a sales guy who got a nice big commission. This is especially important with retirement assets! When it really comes down to it, the best solution is to find an advisor that is a teacher and not a salesperson - A teacher will help you answer yes to the "Could I explain this to my mother?" rule!

You see guys, being a successful investor is not about how sophisticated you are. It’s not about keeping up with your brother-in-law, buying oil and gas contracts, or implementing option overlay strategies. Being a successful investor is about earning returns while taking acceptable risk. You are the one who decides how much risk is acceptable – not your brother-in-law.

The most important role of an advisor is to help you identify your risk tolerance and help teach you where the risk lies in your portfolio.

I tell people all the time that investing is not rocket science. You can do it! The trick is finding the right person to help you along your path. You should leave a meeting with your advisor feeling like you have a deeper understanding of your financial position. That could include investments but it’s not limited to just that. You could also be learning about managing your debt load, insurance, taxes, estate planning or any other topic surrounding your financial wellbeing!