When Your Friends Ask You for Financial Advice
by Debra Karplus
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You look like you are doing well financially, and frankly, you are. Your house and furnishings are in good repair as is your car. You and your family dress tidy and stylish. You don't work crazy long hours. You seem to enjoy your leisure time and are able to take a few vacations each year. But, your family has worked very hard at living frugally over the course of many years.
So what do you do when your retired friend, who cannot seem to make ends meet, inherits $10,000 and seeks your financial advice on how to invest this windfall, because, after all, you do appear to be doing well financially?
Whatever your credentials or background, giving financial advice to friends, solicited or unsolicited, cannot possibly have a good outcome in the long run. If all goes well, your friend will defer to your "expertise" in financial matters, become dependent, and assume that you will become their financial guru forever. But ultimately, if your advice goes sour, so does the friendship.
What advice can you safely offer to your friend seeking financial advice from you?
Encourage your friend to attend free local financial seminars and to read online about money and investing. Some especially useful sites are Finance.Yahoo.com and Fidelity.com, but there are numerous other useful financial websites.
Some communities also offer free money-mentoring services such as the Champaign County Cooperative Extension in Central Illinois.
Perhaps the best advice you can offer is to contact one of the local banks or investment companies that offer a free portfolio review. These services really are free. The hook is that they hope to get some paid business from this service somewhere down the road.
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Remind your friend that everyone has a completely different financial situation in terms of income and expenses. Also, discuss that we all have different kinds of assets like a savings account or pension and different liabilities like a house, car, or credit card debt.
Inform them that a free portfolio review will involve bringing in bank and investment statements and answering questions to determine where money works best based on the age, time horizon, and how aggressive a risk taker the investor might be.
The financial professional should be able to clearly explain to them the difference between mutual funds, exchange-traded funds (ETF), and individual stocks and bonds. They should also describe the difference between index funds and other types of funds, including lifestyle funds.
Additionally, if your friend ultimately decides to employ the services of a financial professional, they should know exactly how much this will cost them and understand fee-based versus commission charges.
You definitely want your friends to do well financially, but they need to really understand that there are few guarantees in the world of investing and that it wasn't just by magic that your family has gotten to a place financially where you are doing well. And remind friends that the stock market does not provide the magical elixir to instant wealth. There is much risk involved in stock market investing.
Be gentle with your friends seeking your financial acumen, but don't put yourself or them in a spot where you could jeopardize your friend's finances or your friendship.
Debra is an occupational therapist, accountant, teacher and freelance writer. She is a writer for Advance for Occupational Therapy Practitioners. She also writes for Grand Magazine, has some items (fiction and non fiction) selling on Amazon.com (kindle), has written several travel articles for the Champaign-Urbana News-Gazette and several articles for freelancewriting.com and volunteers as a money mentor for the University of Illinois Cooperative Extension money mentoring program. Learn more about her at DebraKarplus.blogspot.com.
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