You will probably need to get a lot of investment advice, especially when you first start out in this area. But when you seek out advice, you should know where it’s coming from. There are specific types of investment advisors and analysts that you need to filter properly.

Fee Based Financial Advisors

If you want to get advice on good stocks to invest in, I would first go to a financial advisor that is fee based. These are advisors that charge a flat fee or may even charged based on the value of the assets they are helping you manage. But what they don’t do is charge based on your trading activity.

Commissioned stock brokers often carry themselves like advisors, which they are. But they are primarily salespeople trying to make money off of your trading activities. So remember that and use a grain of salt when listening to them.

Unfortunately, the marketing is on the stock brokers’ side. They do a way better job at getting clients than the fee based guys. They can also usually handle more clients. And I guess they have more of an incentive to get quick hits. They tend to make more money too.

Financial and Stock Analysts

The same goes for analysts. Use critical thinking and judgement when you are listening or reading research from a stock analyst that works for a brokerage firm. Make sure they have no other ties to the stock, like having them as investment banking clients. If they do, be a little more skeptical about their analysis.

Also, be skeptical of analysts that don’t make sense. They may have anulteriormotive for recommending a particular stock.

For example, I just saw a stock analyst recently recommend Netflix. His reasoning was that their business, in terms of certain metrics, looked exactly like Amazon’s a decade ago. But that was his only reason.

I’m sure if I really looked, I could find a dozen horrible companies that resembled successful companies a decade ago.

What the analyst didn’t do is answer the objections of people who don’t recommend Netflix. He didn’t discuss their core business model, which giants like Amazon, Apple and Google are starting to compete well in. He did mention that the company he works for holds Netflix stock.

 

About David Chung

I’m the managing director of a financial website called Finance World.