I’m a Financial Advisor: Here’s Why I Don’t Have These 3 Investments in My Portfolio
Written by
Andrew Lisa
Edited by
Ashleigh Ray
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Competent investors know to put their money in play for the long term, avoid trying to time the market and diversify their holdings.
But they enlist the services of financial advisors to take their game to the next level and craft customized portfolios tailored to their specific goals, risk tolerances and retirement timelines.
But the advice money pros dispense doesn’t always reflect the investment decisions they make in their own financial lives.
To learn about the investments that financial professionals avoid in their own portfolios, GOBankingRates spoke with three advisors from three different backgrounds — insurance, law and real estate. The one point of agreement is that what’s poison to the pro might be perfect for the client.
Here’s a look at the investments that financial advisors avoid.
Cash-Clogging Illiquid Investments
Hazel Secco, certified financial planner and president of Align Financial Solutions, likes to keep her cash plentiful and accessible.
“I run my own business so I feel more comfortable having higher-than-average cash reserves,” she said. “Therefore, I currently don’t hold investments that can incur early penalties.”
Secco cited private REITs, structured notes and annuities as examples.
“These investments can incur early distribution penalties if you want to liquidate the fund prematurely,” she said.
One Person’s Cash Hog Can Be Another’s Income Source
Secco avoids most illiquid investments, but she knows they might be a good fit for some of the people who come to her for guidance.
“For example, private REITs can be a great investment that generates quarterly or monthly income,” she said, adding that many skilled investors use this asset class to diversify their portfolios for less market correlation. “However, since these are not traded on the public market, clients are allowed to request liquidation on certain days of the month or they are sometimes held off from liquidating at all.”
Her primary focus is ensuring her clients understand what they’re getting into.
“I highly recommend clients always know the expected investment time horizon for each investment vehicle to plan their distributions accordingly.”
Her motto is to recognize each client’s unique situation and leave herself out of it.
“There are certain investments I don’t hold in my own portfolio but that doesn’t necessarily mean that I would not recommend that investment to my clients at all,” said Secco. “I take each client’s comfort level towards risk and their financial goals into consideration when I build a portfolio.”
Speculative Bets Like Unfamiliar Emerging Cryptocurrencies
Paul Wood, FRSA, is the founder of C-PAID, a legal service that deals with inheritance, estates and probate. While he’s not opposed to crypto comprising a small portion of his portfolio, he would never roll the dice on one of many emerging coins that fuel unproven blockchain ecosystems.
“I’m wary of altcoins with no utility beyond hype-driven speculation,” he said. “While fortunes can be won and lost chasing rallies, fundamentals ultimately prevail.”
Wood believes that the sheer volume of emerging crypto tokens makes the entire asset class impossible not to ignore.
“Extreme diligence is required to identify solid projects versus false promises,” he said.
Advisor or Average Joe, Be Leery of Unknown Quantities
Off-brand altcoins are just one example of a dangerous class of assets.
“Generally, I’m cautious about excessively speculative investments without clear value drivers,” said Wood.
So, does he ever advise his clients to veer from the prudence he applies to his own portfolio?
“Some exposure to higher-risk, high-reward bets can make sense for those with the risk appetite and capacity,” said Wood. “But unchecked speculation often ends in financial ruin if it’s not balanced out with safer options.
“Diversification is key, but for all, I recommend that everyone prioritizes a firm foundation first. Manage debt, make sure you have enough to live on, invest in your retirement, make use of available tax incentives and so on.”
Complex Leveraged Investments
The Great Recession increased public awareness about complicated and little-known assets that proved irresistible to daredevil Wall Street gamblers — until they proved to be hand grenades waiting to explode.
“I’vе аlwаys been cautious аbоut hеаvily leverаged invеstmеnts, especiаlly thosе thаt might look gооd on рарer but hаvе underlying risks thаt аrеn’t immеdiаtely obvious,” said Dennis Shirshikov, professor of finance, economics, and accounting at the City University of New York and the head of growth at Awning, which helps people support their retirement through real estate investing.
“An exаmрle оf this would be сomplex derivаtive рroducts, whiсh, while thеy cаn оffer high rewаrds, сomе with high risks thаt аrеn’t аlwаys cleаr. It reminds mе оf thе 2008 finаnciаl crisis, whеrе mаny leаrned thе hаrd wаy аbоut thе dаngers оf such invеstmеnts. I hаd а colleаgue whо once tоld mе thаt if yоu cаn’t explаin аn investmеnt tо а five-yeаr-old, yоu probаbly shouldn’t be investing in it. Thаt’s а mаntrа I’vе keрt with mе throughоut my cаrеer.”
If You Have the Knowledge and Can Stomach the Risks, It’s Your Money
Shirshikov would never put his money into derivatives or any similar asset class — but he’s aware they’ve made a lot of people very rich.
“Investmеnt is а highly pеrsоnаlizеd рrocess,” he said. “While I might аvoid certаin invеstmеnts due tо my оwn risk tоlerаnce аnd finаnciаl goаls, thаt doesn’t mеаn thеy’re not suitаble fоr othеrs. It аll сomеs dоwn tо understаnding thе client.
“I once hаd а client in hеr eаrly 20s, fresh оut оf college, eаger tо get intо thе stоck mаrket. Shе wаs willing tо tаke on mоre risks in hоpes оf highеr rеturns, sо wе lооked intо sоmе emеrging mаrkets аnd stаrtups. Сonversely, I’vе wоrked with rеtirееs whо prеfеr sаfer bets like bonds оr dividend-pаying stоcks. It’s аll аbоut bаlаncing risks with rewаrds аnd ensuring it аligns with thе individuаl’s goаls аnd risk аppetite.”
More From GOBankingRates
