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Should I Listen to My Brother/Cousin/Friend’s Investment Advice?

Should I Listen to My Brother/Cousin/Friend’s Investment Advice?

July 13, 2020
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In few words: no.

In many words:

Did your brother/cousin/friend have an in depth conversation with you to understand your financials prior to their recommendation?

The key to investment advice is that it is personalized– what is a good idea for one person may not be for another. As detailed by FINRA rule 2111, financial professionals must ensure that the recommendations they make are suitable for that individual. To help us make suitable recommendations, we take your whole financial situation into consideration. The rule states that this “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, [and] risk tolerance”.

If you come up to me on the street and ask what a good investment would be, my answer will always be “it depends”. There’s no way for me to know what would be a “good investment” for you until I have a firm grasp of your personal situation.

Are they a financial professional?

Many people do have a firm understanding of finance and investing, but is it their job? Financial professionals must study for months. pass demanding exams (I took four!), and complete continuing education every year to help ensure that they are as knowledgeable as possible.

Are they trying to get rich quick?

Often, these investment ideas passed along from friends and family are centered around the mindset of “getting rich quick” rather than implementing a strategy in alignment with your long-term plan to pursue your individual goals and dreams. I’ll admit, the first option sounds a lot sexier and fun, but slow and steady often wins the race.

Is there a time crunch involved?

When clients come to us in these situations, there is almost always a time element. Their friend has told them that they have to get in now or they’ll miss the boat (and the opportunity for buckets of money!). This urgency is often fabricated to push investors into committing. The first thing to do is to take a breath and remind yourself that there’s always time to think and make an educated decision.

What kind of investment are they recommending?

What you may not realize is that your friend may be recommending an alternative investment. For example, bitcoin isn’t a security. Securities are regulated by the US Securities and Exchange Commission. Investments like bitcoin are not. If your friend is recommending a high risk, unregulated investment, you may want to think twice.

The takeaway

When it comes down to it, we as financial professionals have a duty to ensure that our recommendations are suitable for each client and their situation and that it’s in their best interest. Your friend does not. The closest they might come to consequences is you not texting them back.

 

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.  Waddell & Reed, Emerge Wealth Strategies, FINRA, and the US Securities and Exchange Commission are unaffiliated entities.  (07/20)