Individual investors are also at risk if they follow the advice of self-appointed financial gurus. By recommending that investors buy certain stocks that often subsequently tank, these gurus indirectly generate profits for professional investors. Some hedge funds make it a practice to short these stocks, essentially betting that they will go down in value. They often do — after an initial run-up spurred by gurus' recommendations.
As they're uncovered, the most onerous conflicts of interest in the financial services industry are banned after public outrage. But don't count on regulators to protect you. The conflicts are like Whac-A-Mole: Every time a practice is banned or spotlighted with a new disclosure rule, the conflicts that fuel them can surface in other ways. If you're to handle your own investments, the solution is education.
The other alternative is to hire an advisor. People are funny about this. They'll hire a gardener for their expertise but may insist on handling their own finances, a far more complex undertaking. You hire an advisor not just for their knowledge and expertise, but for the discipline they can bring to the task — kind of like a personal trainer, except they do all the heavy lifting. Objectivity and the time it takes to handle finances are the reasons many successful financial people hire advisors. For example, many CEOs and CFOs with financial services companies have outside independent advisors.
To hire the right kind of advisor, consumer research is essential. Choosing wrong can be the biggest mistake you will ever make, so this task in itself requires consumer education.
There are many things to look for in an advisor, but most important is the absence of conflicts of interest regarding how they are paid. After all, how can they protect you from the conflicted financial services industry if they are no different?
To get the most out of an advisory relationship, you should learn the basics so you'll better understand the options the advisor presents. So whether you handle your own investments or hire an advisor, a certain amount of education is critical. For either route, resolving to learn more about investing is a key step toward financial empowerment and, ultimately, toward control of this important part of your life.
This work is the opinion of the author and not that of ABC News.
Laura Mattia is a partner with Baron Financial Group, and a fee-only financial advisor. She's a Certified Financial Planner professional (CFP®), a Chartered Retirement Plan Specialist (CRPS®) and a Certified Divorce Planner (CDFA™) and holds an M.B.A. in accounting/finance. Her Internet radio show is Financially Empowering Women™ with Laura Mattia. A professor at the Rutgers University Business School, Mattia is completing a Ph.D. in financial planning from Texas Tech University; her dissertation is on how to help women plan for retirement.