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Can your friend be your financial advisor?

There is an element of comfort in dealing with friends. “At least, they wouldn’t cheat you” is the usual reasoning. But then, there can be pitfalls as well.

Abdul frequents the cricket club where his friend Raj visits occasionally. Both grew up together and are cricket aficionados. 

One sunny day, the conversation went thus:

“It’s good to see our children play so well. They need constant nurturing and financial protection to take them further” told Abdul. “I am already doing my bit, thanks to my financial advisor. He is none other than our classmate Joseph” replied Raj. 

“Oh, that guy. He was good in academics. I also need a financial advisor to set my finances right” said Abdul. “Hope he is good?” 

“Yes. After signing up with Joseph, my portfolio is up 20 percent” beamed Raj. “Wow, connect me to him” pleaded Abdul.

Testimonials

In this conversation, Abdul hardly discusses the credentials of the financial advisor. Moreover, details about advisor’s track record are insufficient. It would have been better if audited long-term performance sheet would have been shared. 

There is an element of comfort in dealing with friends. “At least, they wouldn’t cheat you” is the usual reasoning. 

But then, there can be pitfalls as well:

Difficult to fire

Imagine a situation where you hire your friend as a financial advisor and your funds turn out to be a dud. What if such underperformance continues for years? It’s difficult to fire a friend – especially when you know that tomorrow you might have dinner with his family. It causes embarrassment and perhaps strain in relationships.

In contrast, a stranger can be quickly brought to book and an ultimatum served for his underperformance. Discussions like fees and outcomes can be made upfront and incorporated in agreements. 

Disclosure issues

Are you comfortable sharing financial information with your friends? Sometimes, it backfires. Once they know you have a tidy bank balance, it’s likely they might approach you during their difficult times. 

Moreover, you need to discuss life goals, family finances and financial planning in detail with your advisor. Withholding any such information can prove counter-productive. Are you willing to bare it all?

People often fall for Ponzi schemes on the recommendations of friends or family members. While their intention could be genuine, you need to do your due diligence. It’s likely that they are not privy to certain information that can put such investments in bad light. 

Mistakes and fraud

People often fall for Ponzi schemes on the recommendations of friends or family members. While their intention could be genuine, you need to do your due diligence. It’s likely that they are not privy to certain information that can put such investments in bad light. 

It’s better to erect Chinese walls between your friendship and finances.

So, how do we pick financial advisors?

Track record

For starters, look at their certification and qualifications. Degrees in financial planning and portfolio management are more important than the rest. 

More importantly, years in the business along with audited performance track record. Often advisers highlight the good cases and hide the worst ones, so as not to frighten you. Check how transparent the advisor is and his or her business practices. Do they have a process-driven system? 

Objective

Don’t hesitate to ask why the financial advisor is advising a product/scheme and not others. And what’s his financial remuneration from doing so? Also, do your own research before you sit across the table. 

A good advisor will be data-driven. His recommendations will be supported by facts and analysis than mere talk in the air. 

Gut feel

Some financial advisors are extremely presentable. But then, they might not listen or have little empathy. They thrust products to earn fat commissions. 

So, look for authentic advisors who are willing to be brutally honest about your finances (and in your best interest). They might not be fun to hang out with, but actually acting on your side.

A good advisor can often broach sensitive subjects and give honest feedback. What’s the gut feeling about the agent? Find it out.

Takeaway

Traits that make someone a good friend don’t necessarily make them a good financial advisor. A stranger can be quickly brought to book and an ultimatum served for his underperformance. But not your friend. It’s better to separate your finances from friendship. 

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