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7 Reasons to Be Wary of Financial Advice from Almost Anyone

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Financial adviser talking to couple on sofa
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In the corner of the room there was a small, round man, with Coke bottle glasses, beckoning me to sit next to him. If not for the red plaid vest and Santa cap he wore so proudly, he could have passed for a wise old owl. I saw my great-uncle rarely -- usually only at holiday gatherings like this one -- and I as I made my way over I knew I was in store for a slice of his worldly wisdom.

"Brian," he began. "You will be graduating soon and making choices about your future. I want to give you some advice. Unless you are planning on being a doctor, a lawyer or an engineer -- professions where you have to follow a specific path -- chances are your life will take many twists and turns before you settle on your ultimate career, so just take them in stride."

It was good advice, the type that you rarely come across and are grateful for when you do. The dynamic is the same when it comes to financial matters -- everybody wants to give you advice, but most of it isn't good for you -- even if it would be for somebody else. Consider these seven situations.

1. Different Things for Different Stages

When I was in my early 20s, my grandfather told me that I should invest my money in certificates of deposit and money market funds to get a safe and steady rate of return. Initially I did that, until I realized that his strategy was tailored specifically to a person in his twilight years.

With 40 to 50 years of investing in front of me, I could afford to be more aggressive in my investments and would do better to have more exposure to stocks. We were at different life stages; what he saw as sensible advice would have been a terrible plan for me.

2. Are You Getting Advice or Being Sold Something?

It's often assumed that when you walk into the office of a professional money management company, the person behind the desk is always going to have your best interest at heart. If only that were the case.

If you are dealing with salespeople who work on commission, their top objective may be selling you on the investment that yields them the biggest compensation. Instead of putting you into the most appropriate low-fee or no-load mutual fund, following their advice might land you might in an annuity that benefits them more than you, with a big back-end bonus, and marginal returns.

3. Ignorance Isn't Bliss -- Especially in an Adviser

If you clean yourself up nicely, put on a well-tailored suit or other smart business attire, and walk into a car dealership, chances are you'll get escorted to the VIP area where the top of the line models are showcased. It will be assumed that you are a person of means, ready and willing to purchase the best that money can buy.

If a financial planner only looks at you superficially, but doesn't make an effort to fully understand your financial picture, he or she won't give you the advice that fits you best, and you might end up being put in the investment equivalent of a Ferrari, when you would be better suited for a Ford (F).

4. Is Your Expert Really an Expert?

Ever get into a conversation with someone where you get the sense that they don't quite know what they are talking about -- but you can't be sure, because you definitely don't? The same thing happens when discussing finances, where talking fast and resolutely can sometimes mask a lack of competency.

What makes it worse is that most people are intimidated by financial matters and assume that the person giving them advice knows more than they do, which can result in them ending up in a less than optimal fiscal situation.

5. Misery Loves Company

Perhaps the most dangerous financial advice you can get is the type that is passed around at the water cooler, at cocktail parties or -- with no disrespect to my great-uncle -- at holiday get-togethers. Friends, co-workers and even family members who want to give you "tips" about their "great" investments should be avoided at all costs.

A strange component of the human condition is that when suffering, we tend to think that others people suffering with us will lessen our discomfort. That advice about a great stock your buddy bought or your cousin's can't-miss investment might be an attempt to get you into something that already has them underwater, so they can have somebody to share their pain.

Conversely, people will sometimes wait until they have a "win" on an investment before bragging about it and urging you to join in with them. Ironically, by that time, the gains are usually peaking, which means you end up getting in at the top.

6. Are You Experienced?

"Don't buy real estate," was the advice my great-grandfather gave me when I was in my late teens. "It's not worth it. Renters are a pain, property taxes will kill you, and prices never go up." He was correct, to a degree, having had experience with three rental properties in his hometown of Salt Lake City. But his real estate experience was specific to -- and thus only applied to -- his location.

I lived in Southern California, where you could hire property managers to deal with renters, taxes were capped by law, and there was a history of year-over-year price appreciation. Though his advice was totally appropriate -- based on his own experience -- in a certain context, it did not apply to my situation and thus would have been wrong to follow.

7. No Risk, No Reward

By far, the most common reason that you should be skeptical of financial advice from others is that everybody has a different view of risk, and how much of it they are willing to put up with. Age, financial savvy and economic status all play a part in our risk tolerance profile, but there is also an intangible component to risk -- the thrill that some get just by taking it.

Some people will invest in pork belly futures and Afghan ice cream parlor franchises just for the excitement it brings them. If you take financial advice from them, you may find yourself staring at the ceiling during the middle of the night more often than you would like.

Do Your Own Work and Avoid the Advice

The bottom line is that taking financial advice from others, either professionals or amateurs, is a risky endeavor, but fortunately one that you don't have to take. Thanks to technology, there has never been a better time than now in which to be able to educate yourself financially.

The Internet is full of resources (like DailyFinance) where you can do research, allowing you to determine your financial path without relying on anyone else's advice. But if your great-uncle gives you some anyway, just give him a hug and say "thanks."

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