What to Look Out for Before Purchasing Financial Products
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- Mar 23
- 3 min read
Updated: Sep 8
What to Look Out for Before Purchasing Financial Products 🧐
Before you commit to any financial product, it's crucial to perform due diligence. Think of it like a personal audit. Don't rely on a single source of information and always ask questions.
Here are the key things to look out for:
Your Personal Financial Situation:
Your Goals: What are you trying to achieve? Is this product for retirement, a down payment on a house, or an emergency fund?
Your Risk Tolerance: How comfortable are you with the possibility of losing money? Your ability to take on risk (based on factors like age and income) and your willingness to take on risk (your emotional comfort level) are two different things.
Affordability: Can you afford this product? Do you have enough saved for daily needs and emergencies? What happens if you can't make future payments?
The Product Itself:
Risks and Rewards: Understand the potential returns and, more importantly, the potential for loss. Be wary of any product that promises unrealistically high, guaranteed returns.
Fees and Charges: Be aware of all the costs involved, including upfront sales charges, management fees, and withdrawal penalties. These can significantly eat into your returns.
Liquidity: How easy is it to get your money out if you need it? Some products have penalties for early withdrawal.
Regulations and Guarantees: Is the product and the company regulated by a government body like the SEC or a similar agency? Understand what is and isn't guaranteed.
The Financial Professional:
Credentials: Is the representative regulated by a relevant authority? Check their credentials and see if they have any history of complaints.
Compensation: Ask how they get paid. Are they earning a commission on the sale of this product? Are they participating in a sales contest? This can reveal potential conflicts of interest.
Suitability: Ask them to explain in simple terms why this specific product is suitable for you, based on your stated goals and risk profile.
Deeper Dive: Due Diligence Before Buying Financial Products 🧐
When it comes to your money, the burden of proof is on the product and the person selling it to you. Here's how to conduct a more thorough evaluation.
1. Analyze the Financial Product's "DNA"
Risk vs. Reward: Don't just look at the potential for high returns. Ask for a breakdown of the worst-case scenario. How much could you lose? For investments, is this a low-risk, medium-risk, or high-risk product? Does the product's risk profile align with your personal risk tolerance?
Total Cost of Ownership: Go beyond the sales pitch. Look for hidden fees and expenses. These can include:
Management fees: What you pay the company to manage the product.
Administrative fees: Costs for things like record-keeping.
Surrender charges: Penalties for withdrawing your money early.
Sales loads: A commission paid to the professional who sold you the product.
Understanding the Fine Print: Read the prospectus, a legal document that provides a detailed description of the product. It will outline the product's objectives, risks, fees, and past performance. If you don't understand it, ask for a clear explanation from the professional.
Regulatory Status and Guarantees: Is this product insured? Is it a member of a program like the FDIC (for banks) or SIPC (for brokerage firms)? What happens if the institution fails? Understand what the guarantees cover and what they don't.
2. Vetting the Financial Professional
Fiduciary Duty: This is a crucial distinction. Does the professional have a fiduciary duty to you? A fiduciary is legally required to act in your best financial interest, not their own. Many professionals are simply held to a "suitability" standard, which means the product they sell you only has to be "suitable" for your needs, but not necessarily the best option. Always ask, "Are you a fiduciary?"
Ask for Credentials: Don't just take their word for it. Check their credentials with a regulatory body. In the U.S., you can use FINRA's BrokerCheck or the SEC's IAPD database to see a professional's licensing, employment history, and any disciplinary actions against them.
Compensation and Conflicts of Interest: Don't be shy about this. Ask, "How are you compensated for this product?" If they earn a commission, it creates a potential conflict of interest. A fee-only advisor who is paid directly by you may have fewer conflicts of interest.
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