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6 Red Flags to Look Out for While Hiring a Financial Advisor

Choosing a financial advisor may arguably be one of the most crucial financial decisions you make. Your advisor is not only responsible for managing your finances but also for building a substantial retirement corpus and achieving other long-term financial goals. This is why you need someone who is capable of making sound decisions and one who takes into account your preferences and risk tolerance. While financial advisors can assist you in navigating the various complexities of investing, they may cause you financial setbacks if the services and advice you offer are not suited to your financial needs. Therefore, before engaging the services of a professional financial advisor, make sure you verify their credentials and check for any disciplinary action taken against them.

In this article, we shall discuss a few red flags to look out for when hiring a financial advisor.

What red flags do you need to watch out for in a financial advisor?

It's good to research your options before committing to any advisor. Examine how well their investment strategies match your long-term goals and be on the lookout for anything that may seem suspicious. Pause and reflect on if a financial advisor promises you extraordinary returns or is trying to engage you by using industry jargon. Also, take care to gauge if they appear overconfident and if they are promising things that seem too good to be true.

Besides these few pointers, watch out for the following red flags:

1. The advisor presents false qualifications and credentials

Many advisors may appear great on paper and over the phone, but often when you conduct a check, one of two things may happen:

  • Either they've been involved in an unethical or disciplinary activity in the past (often referred to as a disclosure)
  • Or they have made false statements about themselves

Also, to lure you, a few advisors may present dubious certifications and qualifications. Many individuals, however, are unsure how to conduct sufficient due diligence to determine whether an advisor is qualified to provide the advice they claim. But, the government and other agencies have methodologies in place to assess the genuineness of an advisor. FINRA (Financial Industry Regulatory Authority), for instance, provides a service called the BrokerCheck that investigates a broker's background and qualifications. Besides, FINRA, SEC (Securities and Exchange Commission), and CFP board provide various due diligence tools to verify an advisor's qualifications. You may also conduct background checks and reach out to other advisors to be entirely sure of the advisor in question.

2. The advisor does not have a transparent fee structure

Often, you may come across advisors who do not have transparent and straightforward fee structures. Some may work on an hourly basis, and a few others on a percentage basis. It is recommended to clearly ask the advisor about the various fees and commissions you would be entitled to pay once you sign them. If they confuse you or do not answer your questions correctly, it may be a huge red flag.

If you are about to pick your first-ever advisor, you can start by enquiring about the average fee of a financial advisor. This way, you will know the prevalent fees in the market and if you can afford it.

3. The advisor makes unrealistic promises in helping you fulfill your financial goals

You should never expect a financial advisor to provide you with a precise return percentage or an exact promise. No individual, no matter how qualified or experienced, one cannot predict market and investment returns accurately.

Take the stock market, for instance. According to a recent study, the average stock market return over the last 140 years has been 9.2 %. It may sound attractive to outperform this number, but it may also be unachievable. Even the most experienced asset managers may not be able to beat this return, so if your advisor claims that they can, they're most likely lying. An advisor guaranteeing a particular return percentage can be a red flag.

If you're going to entrust someone with your money, you may want to deal with someone who offers realistic advice and guidance.

4. The advisor trades or invests without informing you or without your consent

Some advisors take advantage of your trust and may initiate trades in risky instruments and ventures. They may push you to passive monitoring of your portfolio. If an advisor has been accused of this before, you may consider not hiring them.

Your advisor should actively inform and seek your permission before initiating or investing in any financial instrument. Sometimes, they may also happen to open 401(k)s, IRAs without informing you.  They may justify such moves by claiming that they have your best interest at heart. And, then you may feel trapped with an advisor who manages your portfolio as per their own wishes and desires.

Thus you need to be extremely careful as your corpus is at direct risk if your advisor engages in uninformed trading.

5. The advisor constantly pushes financial products and schemes

To out-smart or confuse you, a few advisors may throw around financial jargon and industry terms. They may insist you to invest in certain products and schemes, stating that they may be suitable. If, despite your objections, they keep circling back to these schemes and products, it could be a sign that the advisor is receiving a high fee from the sale of that product and is not acting in a fiduciary capacity. If you believe your advisor is being pushy about a product, it may so happen that the advisor's motivations differ from yours. Most likely, their ultimate goal is to propose products that pay them the most money, ignoring your profile and risk tolerance. This is potentially a huge red flag. You need to be mindful of your advisor's guidance and not trust everything the advisor offers.

6. The advisor is unresponsive to your queries

It is a notable red flag when advisors sound highly client-centric and dedicated to you over the phone but then become unresponsive later. The initial interest and ready availability might be just to lure you in. Once done, they may treat you differently. It's a red flag if they take too long to respond, whether to a simple email, a phone call, or any question you may want to ask. It could also potentially mean that the advisor works as per his own schedule and will not accommodate you if you have a pressing or time-sensitive request. Always keep in mind that if they don't follow through on your initial calls, there is a high possibility that they won't follow through if you become a client.

To summarize

Before hiring a financial advisor, you need to watch out for common red flags. Not all advisors may have your best interests at heart. When interviewing them, know what questions to ask and be mindful of any unusual statements and activities. When you work with a bad financial advisor, you're working with someone who isn't looking out for your best interests. This may cause you to lose sight of what's important to you, making it more difficult to achieve your financial goals. Hence, before hiring an advisor, ensure you thoroughly verify their skills and qualifications.

Use the free advisor match tool to match with experienced and certified financial advisors who act in your best interests at all times. Give us basic details about yourself, and the match tool will connect you with 1-3 professional financial fiduciaries that may be suited to help you.


The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.

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