The 5 most common mistakes financial advisors make

Much financial advice is of poor quality, even when you take out all the commissions and corruption.  Why?  It’s because too many advisors fall into the same five errors that everyone else falls into.  Understand what those five mistakes are, and you’ll be much better able to find good advice and avoid bad advice.

This is an extract from my book, The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Low to Medium Income.

How Good (or Bad) Are Financial Advisors?

       An article in Forbes magazine suggests that good advice might be worth an extra 3% return per annum or by more than 20% increased retirement savings, including improved tax efficiency.[i]  It seems very hard to put a definite figure on it because it would depend on many variables, not least how well the client might have done without that advice in the first place.  If he had read this book and made educated decisions, perhaps not such a huge amount.  If he hadn’t read this book, was not already aggressively paying off debts, had no budget or emergency savings, and was about to put 100% of his cash into junk bonds some guy was selling him over the phone, then the benefits of getting good advice would be spectacular.

Another piece of research suggests that financial advisors, through their own misguided beliefs, often fall into five errors:

  1. Chasing past performance. Remember the box about that a little while ago?  Past performance is not necessarily an indicator of future performance, and whatever has shone like a thousand suns over the previous five years might stink like a gasoline stand toilet over the next five.
  2. Focusing on actively managed funds. Remember how I got stuck into them at some length?  The fees are too high; index funds are better.
  3. Chopping and changing investments too frequently. Remember how I said to stick with volatile growth assets for the long term?  The next chapter explains when you should and should not change investments.
  4. Not diversifying enough into international shares. I told most of you to do that, too.
  5. Related to 2. above, choosing products with high fees.

After all fees and charges were accounted for, those who had an advisor were doing about as well as those who didn’t.[ii]

But don’t despair.  A lot of those let-down clients probably lacked financial literacy because they did not read this book, or one like it.  When you go in for your preliminary meeting with a potential advisor, you’ll see for yourself if he is falling into these traps.  If he is, find yourself someone else or go robo.

Just because your advisor is wearing an Armani suit and has a compelling, Morgan Freeman voice and authoritatively graying hair, that does NOT mean that he must be right and you must be wrong.  You know all about paying off debt, diversification, index funds, and identifying good advice.  Don’t be afraid to use your knowledge.  You should be pretty confident by now, because you know nine tenths of everything you need to know for reaching financial freedom.

Let’s conclude by working through that final tenth of money wisdom.



End of sample.

To learn more about reaching financial freedom, get my book:

The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Low to Medium Income

Also available on many other platforms.


Also available on many other platforms.


One comment

  1. William Letzer · December 25, 2020

    Valuable tips Nikolai.
    You have perfectly covered up the all the important points.

    Liked by 1 person

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