14 Signs a Financial Advisor is Bad for You
It may be difficult to find an advisor who not only possesses the required financial expertise and knowledge, but also understands your needs, and helps you earn the best returns. But how do you detect a bad financial advisor, and how can you verify if your financial advisor is qualified and suited to meet your financial needs?
There are certain signs that you can look for to spot bad advisors and save yourself from a good deal of trouble. To find out which red flags you should keep an eye out for when interviewing advisors, do reach out to a professional financial advisor who can guide you on the same.
Read further to find out which signs you should look out for to assess if an advisor is bad for you:
Why is it important to check if your advisor is the right fit for you?
No matter what size your corpus is, a thorough financial advisor check is important to ensure that you are entrusting the right person with your hard-earned money. A poor financial advisor isn't essentially a criminal. In fact, some may be well-meaning, and give you the required attention. But you may find that they either do not have adequate education or experience or are simply not in sync with your philosophy and vision. Also, there may be other signs that may point towards an advisor not being the right fit for you.
Let us discuss certain signs that might indicate that a financial advisor is bad for you:
1. The advisor guarantees high returns
Typically, advisors try to promise good returns in one way or another. This may not be problematic as long as they are not 'guaranteeing' or over-promising returns. Such financial advisors may seem attractive but they are among the first ones that you must avoid. Remember, high returns always mean high risks, and guaranteed high returns veers in the category of being too good to be true. If the advisor does not inform you about the risks and costs involved and simply promises high returns, you may be dealing with a financial advisor who may not prove to be suitable for your financial needs.
2. The advisor primarily earns from a commission-based model
Advisors earn commissions on selling certain financial products and services. If you suspect that your financial advisor is pushing you toward a specific mutual fund or annuity, chances are that he may be profiting through a commission, and his suggestions may not be in your best interest. Let the advisor explain the cost and fees of your investment, commission costs, custodial and trading fees, etc., to you and then make an informed decision.
Also, note that it is a requisite for all financial advisors to fill out the ADV form if they wish to register their license with the SEC (Securities and Exchange Commission). You can ask for a copy of the form to get an idea of their fee schedule and other sources of income from the financial advisory firm. This way, you can find out if they are earning commissions or not.
3. The advisor is only a part-time fiduciary
A dually-registered financial advisor may sound attractive, but may only be an eyewash. Before you sign a contract with them, ensure that they aren't into a hybrid association model. A hybrid model means that they are part-time fiduciaries and part-time commission agents. A fiduciary is legally bound to prioritize their client's best interests over their own. However, if they also work as brokers, it may lead to a conflict of interest. It is advised that you opt for a registered investment advisor or RIA who is legally mandated to work in your best interest at all times.
4. The advisor’s investment strategy is the same for all their clients
Every investor has unique financial needs, goals, circumstances, and risk tolerance. A good financial advisor will be mindful of these differences before suggesting any options. A one-shoe-fits-all approach to investments may not be beneficial for anyone except the advisor.
The first meeting with a financial advisor should be a detailed discussion about your goals, risk appetite, circumstances, etc. For example, if you are an extremely risk-averse person and your financial advisor suggests you invest in cryptocurrencies, the advisor may not be the right fit for you.
5. The advisor does not have any credible qualifications or credentials
You must look for advisors with credentials such as Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Personal Financial Specialist (PFS), Registered Investment Advisor (RIA), and more. Doing so will help ensure that you are trusting your money to someone who has the required financial expertise and experience to manage your finances and that your money is in safe hands.
Some designations also require planners to stay updated with the changing landscape of the financial sector to keep their certification active. This is a great way to ensure that you are dealing with an expert and not a salesperson.
6. The advisor charges exorbitant fees
There isn't an industry standard when it comes to the fees of a financial advisor. While some charge a flat fee, some charge hourly, and others charge a percentage of the volume of financial assets they handle. Some advisors may also charge a combination of fees, for example, a flat fee for financial planning and a percentage of assets managed. Experts suggest comparing fees from different advisors to arrive at a figure that you may be comfortable paying.
7. The advisor does not give you time to think
If your advisor tries to instill a fear of missing out on an opportunity, it may not be wise to continue engaging his services. You should steer clear of advisors who use marketing gimmicks or sales tactics to bank on your emotions to sell a product or service to you. This is a telltale sign that your financial advisor may not have your best interests in mind.
8. The advisor boasts about the financial services and attention they offer
If an advisor speaks highly of himself, the services and support he offers but his actions and performance indicate otherwise, it is a major sign that this advisor is an ill fit. Ask him for his performance reports. Performance reporting for financial advisors must entail data that shows how they have helped you or other clients progress financially. Ask for examples of how they have added value to their clients‘ financial plans and how they can do the same for you.
9. The advisor talks about exclusive investments that only he can access
A claim of exclusivity is either a lie or an attempt to trap you into an investment that will earn them a commission. It is best to stay away from advisors who pretend to be the best and the most well-informed. You are better off with a person who consults experts, reads up to verify information, and brushes up their knowledge rather than being complacent.
10. The advisor hides their face when times are somber
Volatile markets and financial uncertainties are more common than you expect. However, an experienced financial advisor has the foresight to sail through such times, and their real expertise shines through only during tough phases. If they avoid your calls through such times or do not proactively call to check on you, they may be a bad advisor. A good advisor will call you to let you know if some of your investments are in murky waters and chart out a future course of action.
11. The advisor counsels you against opting for a third-party custodian
A third-party custodian holds customers' financial assets for safekeeping to prevent them from being stolen or lost. They also send you your financial statements and keep you apprised about the performance of your investments. If your financial advisor is insisting you skip hiring a custodian, it may be a red flag and something you should keep an eye on.
12. The advisor is a commingling name on the account title
The name on the investment account grants unrestricted access to the funds, and it may not be a wise decision to allow access to your funds to your financial advisor. Giving the advisor such power could lead to embezzlement. Check the statements from your custodian to verify that only your name appears on the account title. Commingling also violates the code of ethics laid down by the Securities and Exchange Commission's (SEC) Code and Practice Standards and is a prosecutable offense.
13. The advisor is against diversification of assets
It is time-tested advice to not put all your eggs in one basket. However, If your money manager is pushing you to invest your funds in one seemingly profitable instrument, it may be time to distance yourself and your corpus from them.
14. The advisor doesn’t send you periodic reports
Detailed monthly, quarterly, and annual reports are important to assess if your investments are yielding good results. A disciplined advisor will send regular reports to keep you informed. If, however, you find your advisor skipping this important practice, it may be a sign of trouble. Furthermore, it could indicate fraud or a cover-up they do not want you to notice.
Hiring a financial advisor is a crucial life decision. Sensitivity to your needs, proactiveness, customized approach and discipline are a few important traits of a good financial advisor. But, exercise caution while choosing a financial advisor and stay alert for any warning signs during your association with them. If you notice any of the above-mentioned signs in your financial advisor, it may be time to look for a new advisor. Always remain alert and place your hard-earned money in the hands of an advisor you find trustworthy.
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