Having a friend as your financial advisor can be risky. There are conflicts of interest to consider, and it is best to do your due diligence. It is especially important if you have a lot of money at stake. In addition, it can be a good idea to have your financial advisor be an objective third party.
Dangers of having a friend as a financial advisor
There are a number of potential risks involved in working with a friend as a financial advisor. For starters, mixing your personal and professional relationships is generally not a good idea. Other professions also discourage providing their services to friends and family, such as physicians, who cite reasons that friendship can compromise the quality of the patient-physician relationship.
Having a friend as a financial advisor may seem like a great idea if your friend is financially savvy. However, it’s difficult to break into the financial advisory business and make a name for yourself. Hence, a friend may be more likely to offer their services for free – even if they’re not qualified.
Another risk is that your friend isn’t completely objective about your finances. Your friend’s vested interest in your financial problems means that he or she cannot give you an objective view.
Conflicts of interest
Whether your financial advisor is your friend or not, there are several factors that could create a conflict of interest. One common factor is sales-based compensation, which makes it difficult for financial advisers to separate their business from their personal life. Moreover, financial advisers may choose to invest in financial products that are not in your best interest, are too risky, or do not match your stated goals.
One way to avoid a conflict of interest is to choose a fee-only advisor. This way, you can trust your financial adviser to put your best interests first. In addition, fee-only advisors tend to be more knowledgeable on the products and services that are available to investors. It’s a good idea to ask your financial advisor about their fees before you hire them.
Another important factor to consider is the appearance of the conflict. It’s important to be transparent about any relationship that may cause a conflict of interest. An advisor that has a business relationship with your friends and family should disclose that fact to you.
Having a friend as a client
Having a friend as a client is something that most financial advisors are cautious about. Although it may seem like a great idea, it is important to remember that it’s a business relationship and not a personal one. The advisor has a strong incentive to sell expensive products to his or her clients. This isn’t always clear to the client.
Some people are skeptical about investing anything other than stocks and bonds. While these options can be beneficial, many investors are wary of anything that strays from the conventional asset allocation model. Many financial advisors fail to offer innovative wealth building solutions or alternative investment strategies. It’s a good idea to have a financial advisor that is open to other options as well.
As with any client relationship, it’s important to know what the costs and benefits are. Many financial advisors charge by the hour, while others charge on a retainer basis. The former has the advantage of continuing referrals, but the latter has its drawbacks.
Getting financial advice from friends and family
Getting financial advice from family and friends can have a variety of benefits. First, people you trust are often more likely to share their personal financial experiences than strangers, which can help you open up. In addition, they are more likely to be open to your ideas and are generally more accessible. But you should also be aware that a close friend or family member may not be able to provide specific advice based on your situation.
Second, be cautious about sharing too much personal financial information with your friends and family members. While a discussion about money is usually beneficial, it can be awkward and may end up damaging a relationship. Indeed, research shows that 57% of Americans shy away from talking about their finances with friends. Third, financial advice from friends and family is not necessarily as sound as that given by a professional.
However, you should remember that if you want to make smart financial decisions, you should get professional help. For example, if you are planning on investing, you should hire a financial advisor. But what if you don’t trust your friends and family?