The exact question to ask to find out if your financial advisor has your best interests in mind

  • In “Millionaire Teacher,” author Andrew Hallam offers advice on finding a financial advisor.
  • He recommends asking if your advisor will invest your money in index funds. If they won’t, drop them.
  • If your advisor only recommends actively-managed mutual funds, they’re looking out for their bottom line.
  • SmartAsset’s free tool can find a financial planner to help you take control of your money »

You’ve probably heard of a Dear John letter, a missive designed to break up with a romantic partner. But what if you want to end things with a financial advisor who you’re starting to suspect might not have your best interests at heart?

Author Andrew Hallam describes exactly how to do this in his excellent text “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School.” 

Hallam urges readers to test their financial advisors by asking them to invest in index funds, a low-fee, unsexy alternative to the actively-traded mutual funds proffered by many money managers. If they happily agree, or have already stocked your portfolio with a healthy balance of stock and bond indexes, then congratulations! You’ve found a good one. 

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If they give you any pushback, however, Hallam has you covered. He walks you through the top four money myths that are frequently offered up in order to steer investors away from index funds — plus exactly what you should say in return.

1. Index funds are dangerous when markets fall

In an ideal world, sure, your advisor would be able to pull your funds from the market and reinsert them at the exact right moment. But since they can’t predict the future any better than you can, this process rarely goes as smoothly in real life as it sounds on paper.

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To illustrate his point, Hallam recommends you ask your advisor whether the majority of their preferred funds beat the index in 2008, when the housing crisis caused the market to crater. The average actively-managed fund lost out to the very indexes they track, which suggests that most managers didn’t see the loss coming, or react presciently enough to cushion its effects.

2. You can never beat the market with an index fund, since by definition it offers only the average return

This read fails to account for the costs and fees associated with actively-managed mutual funds. To make this statement reality, Hallam estimated in a previous chapter that any given mutual fund would need to beat the index by a full 4.6% just to break even. 

So until everyone on your money management team is ready to work for free and waive your tax obligations, it’s tough to make anything but an apples-to-oranges comparison of index funds and actively-managed mutual funds.

3. There are plenty of funds that repeatedly beat the index, and we’d be buying you only securities of that caliber

This data is incredibly compelling, but it’s available only in hindsight. Previous success is no indicator of future performance, and top-rated funds have nowhere to go but down, no matter how long they’ve been soaring. 

So unless your advisor’s portfolio was stocked exclusively with those winning funds during their boom years, the fact that they can pick historical successes out of a lineup doesn’t mean a whole lot.

4. As a professional, I can bounce your money around to the hottest tickets, taking advantage of my industry knowledge

Considering you pay for every trade your advisor initiates, to me this reads more as a threat than a promise, but that’s my own bias edging in. For his part, Hallam notes that some new money managers may have had just two weeks of training before they’re sent out into the job market. 

Many stockbrokers and certified financial planners are extremely knowledgeable, well-informed, and protective of their clients, of course, but it’s hardly an industry requirement. The skill that’s actually exalted above the rest is salesmanship, so do your own research and seek out education on the topics you’re bringing to your advisor. (Hallam recommends three texts for this education: “The Four Pillars of Investing” by William Bernstein, “A Random Walk Down Wall Street” by Burton Malkiel, and “Common Sense on Mutual Funds” by John Bogle.)

If you compare notes and find agreement with your financial advisor, great! But if you don’t, don’t necessarily second-guess your own instincts where they conflict with those of your planner. Ultimately, it’s your money, so you’re the one with the most incentive to protect it. 

The best way to ensure your money is invested wisely is to choose a fiduciary financial planner or advisor. These professionals are bound by law and ethics to make decisions and recommendations in your best interests. Certified financial planners are always fiduciaries. Look for a “fee-only” planner or advisor rather than one who works on commission.

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