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7 Truths Even The Best Investment Advisor Will Never Tell You

How many times have you heard someone say something like: "I'm not worried. I have the best investment advisor"? If you're like most people, you've heard some version of this statement a number of times in your life. It makes sense, of course. You wouldn't want to trust your money to anyone but the best investment advisor possible. Still, that doesn't mean yours is actually the cream of the crop.

Regardless if they have decades of experience and an impressive track record, it's important to understand that even the best have their limitations. Let's take a look at seven truths that even the best investment advisor probably isn't rushing to tell you.

Even the Best Investment Advisor Is Only Human

This seems obvious enough. You know they're only human, after all. Nonetheless, it's vital that you not get caught up in their resume, their title, claims they may make about your portfolio's potential and other exciting predictions that can distract from this important truth.

Your investment advisor is not clairvoyant. They cannot predict the future of the market with 100% accuracy. It doesn't matter if they're proven to be the best investment advisor ever, there are going to be times they make mistakes. Prepare accordingly.

Furthermore, you have to realize what happens to these people on a daily basis. Though they may provide you with a confident veneer, stress is most likely working on them around the clock and for good reason. They're responsible for a lot of money.

Now, say the market takes a bad turn and maybe they have 100 clients. That could be 100 calls they're going to get that day. Some clients might even call more than once. Their phone could be ringing every five minutes.

Take all of the stress they're normally under and now add in the stress from these market conditions. The best investment advisor or not, it's going to be hard for them to find a clear mind with which to make a decision about your money. The market could be at the bottom of a correction, and they're telling you to sell.

There's a Huge Disparity Between Investment Advisors

Goethe University in Frankfurt, Germany released a study in 2012 titled, "Financial Advisors: A Case of Babysitters?" In short, it argued that financial planners are often more trouble than they're worth. To be specific, it found that those who used financial advisors saw lower returns than those who did not, on average.

It was no small amount either. The average was 5%. Over the years, that's a lot of money.

That doesn't mean you shouldn't trust a professional with your finances. It does mean, though, that you really need to do your best to find the best investment advisor within your price range. Clearly, there is a huge disparity across the field, and that could do serious damage to your future.

Their Motto Is Most Likely "Safety First."

Now, one popular interpretation of the above study was that this result simply showed investment advisors were trying to keep their clients safe from a volatile market. It's not as they lost them money, on average.

The dataset proved otherwise, but let's say this assumption had held up. Even then, it shows that you need to be the one who sets the risk threshold. Your advisor may decide to take that responsibility on for you, especially if they're concerned with protecting their own bottom line.

Therefore, if you can accept a bit more risk, be sure you're checking in regularly to make sure that's what's happening. Otherwise, the "best investment advisor" may play things too safe and end up hurting you.

They Make Money Regardless of Your Portfolio

A lot of people naturally assume that their advisor only makes money when they do. If their portfolio grows, then the advisor gets a cut, right? More likely than not, though, an investment advisor also makes money each time you buy or sell. Their commission comes from transactions, in other words, and not solely when you profit.

Many investment advisors use a fee-based model, which means they aren't encouraged to trade within your account very often. In this case, you are paying them between 1-2% on AUM annually regardless of the result. Of course, if your invested assets return annually at 10% or higher, then paying 2% is fair. However, if they are returning under 5% or even a negative return, then it is an unfair game.

This is why you have to ask your investment advisor right away about how they make money. They're legally required to give you all the details. A lot of people never ask, though, and find out the hard way that their advisor's interests were other than they had thought.

You Could Be Spending Way Too Much

Even the best investment advisor is going to have a tough time telling you to slam the breaks on your contributions. Even if they make a commission on every transaction, they still have a vested interest in you inflating your portfolio.

Sometimes they know this isn't the best idea. Going back to our first point, they can't predict where the market is going to go. They may know you're overleveraged, but aren't going to tell you to either pull funds out or get rid of some of your favorite luxuries.

A Lot of Their Work Is Done by Software

In an attempt to come up with accurate forecasts for your money, a lot of investment advisors use software. This sounds smart, of course. A lot goes into considering the numerous factors involved in these kinds of predictions.

The problem is that the models they use-often called "Monte Carlo" simulations and named after the European gambling hub-are only as good as their inputs. It's also likely that many competing advisors are using the same titles. So you could be paying someone a lot of money to basically run a platform that their more affordable competitor also uses.

Discounts Are Possible

Just like with a lot of services, there's room to negotiate. Of course, most investment advisors would never bring this up. However, they have quotas to hit in terms of clients and portfolios, so you may definitely have success telling a prospective advisor that you need them to meet you somewhere in the middle where fees are concerned. It definitely wouldn't hurt to try.

If you prefer a low-risk solution and aren't considering a double-digit return on your invested assets, put your money in a target-date fund or try to use one of the "robo-advisors", which charge an average of 0.25%. It is just a fraction of what you are likely paying now to your investment advisor.

Larry Ludwig, the founder of Investor Junkie, has done an extensivereview of robo-advisors.

Time will tell if you actually have the best investment advisor or not. In the meantime, you can do yourself a huge favor by keeping the seven truths we've covered above. If you already have an advisor, keep these in mind during your dealings.

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