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Financial Advisor Red Flags to Watch Out For

November 14, 2022.

Finding the right financial advisor is a task that should not be taken lightly.  Below are 16 red flags to be on the lookout for when searching for or working with one.

Red flag #1: They have blemishes on their record

A first step in vetting a financial advisor is looking them up on BrokerCheck, a tool from the Financial Industry Regulatory Authority that allows you to research the background and experience of financial brokers, advisors and firms. This can let you see if an advisor is legally registered to manage someone’s finances, and whether any regulatory actions or complaints have been filed against them.

 Red Flag #2: They Don’t Communicate Proactively  

By meeting regularly, advisors stay current on what’s happening in a client’s life, but clients also know what’s going on with their financial plan. All too often, clients see what’s happening in the news about the stock markets or they hear from their colleagues first, but a good advisor reaches out proactively with a plan in mind.  Not only does proactive communication showcase an advisor’s care for their clients, but by meeting regularly and reaching out before circumstances change, advisors can stay abreast of changing scenarios and plan ahead. If your advisor seems to always be reacting to circumstances instead of proactively planning for them, it may be in your best interest to walk away.

Red Flag #3: They Don’t Return Your Calls or Emails 

Can you talk to your advisor by phone, email or in-person when you need to? Or are they almost impossible to get a hold of?  Your financial advisor should communicate with you on a regular basis. This is especially true during times of crisis.  If your advisor hasn’t helped put your financial concerns to rest during the Coronavirus pandemic, what’s going to happen when you need help managing withdrawals or dealing with an unexpected emergency in retirement?

Red Flag #4: They Don’t Inform You of Changes

Your advisor should not make significant changes to your financial plan or portfolio without consulting with you first.  This helps keep an open dialogue between the client and the advisor, and helps to avoid any unpleasant surprises down the road.

Red flag #5: They’re Not Transparent about how they make Money

Your financial advisor should be able to clearly explain how they make money. The three most common ways advisors make money are:

  • Flat Fees: They charge a fee to clients for financial planning.
  • Investment management: Advisors are usually paid a percentage of the value of the assets under their management.
  • Commissions: They get paid for selling you annuities, insurance, or other financial products.

These fees should be clearly and prominently displayed on the reports and invoices that you receive.

Red flag #6: They can’t answer Tough Questions

Aside from checking their credentials, you should also meet with a potential advisor before hiring them. Most advisors will offer a free introductory conversation to see if the relationship is a good fit.

You should ask tough questions as part of this conversation.

  • Ask about their client base and whether it includes people who share your goals and circumstances.
  • Ask them for some constructive feedback that they’ve received from a client recently.
  • Ask them about a time that they weren’t able to meet a client need.
  • Ask them about a mistake they’ve made in the past and what they’ve learned from it.

Asking them tough questions can give you clues into their decision-making process and how they would handle a tough situation, both of which can help you determine if the advisor is the right fit for you.

Red Flag #7: They keep coming back to you with the ‘Flavor of the Month’

If every courtesy call is really just a sales pitch in disguise, take your money and run.  While a financial advisor will be genuinely interested in your personal well-being and in building a lasting relationship with you, a salesperson will only remember to call you when they need to get you to invest in a new life insurance policy, or the like.

Red Flag #8: They only focus on Insurance or Annuity Solutions  

A popular adage says, “if one is a hammer, everything looks like a nail.”

Numerous broker-dealer and hybrid companies, with names often ending in “Life” or “Mutual,” focus exclusively on selling insurance policies and annuities. Insurance is undoubtedly an important piece of any financial plan, but that is precisely what it should be: a piece of one’s financial plan, not the entirety of it. Unfortunately, many insurance agents focus solely on the solutions they provide, not the whole picture. Additionally, many are incentivized to assure their clients and prospects not to look beyond these solutions.  If the advisor only recommends these types of products to you, take it as a bad sign.

Red Flag #9: They Urge You to Act Fast 

The wrong financial advisor will rush you to make decisions. They’ll often give you a five-minute sales pitch, then say you’ll miss out on the opportunity of a lifetime if you don’t act now.  When it comes to saving for your future, rushing isn’t the answer. In fact, the last thing you want to do is make a financial decision on a whim, only to find out it wasn’t the right move later on.  The right advisor will give you the time and space you need to make an educated decision. They’ll encourage you to explore your options to ensure you’re making the right choice.

Red Flag #10: They Promise Returns and Success

If something sounds too good to be true, then it typically is! Plain and simple. Investment performance is never guaranteed, period, and nothing is without risk.  If an advisor tries to convince you otherwise, you know that he/she isn’t the one for you.

Red Flag #11: They Won’t Give Claims in Writing

An advisor may verbally say they’re a fiduciary, but if they aren’t willing to put it in writing, be wary.  The best advisors back up their claims in writing when you ask them to. They’re clear about any potential conflicts of interest, and they tell you how they’re paid upfront.

Red Flag #12: They Don’t Understand Your Values

An adviser should ask you about your money values and beliefs and put together a financial plan in accordance with those, because your values can have a direct impact on how your investments are managed.

Red Flag #13: They Push Complex Investment Products  

Structured products are reasonably complex bundles of options or derivatives that have a variety of uses. You can use structured products to minimize market risk, structure them to take advantage of a market pullback or run, or even leverage volatility in an asset class or a specific security. Sounds great, right?

Well, there are two issues often seen with structured products. The first is a lack of liquidity and clarity on the product’s value. When looking at your account statement for the value of the product, it’s often very difficult to understand, let alone explain.

The second is that structured products also carry high sales fees, often between 2-6%! These fees mostly go to the broker and should be scrutinized carefully. Additionally, the fees should be disclosed both verbally (ideally, in terms of “dollars and cents” instead of expressed only as a percentage) and in writing. Often, these important fee details are hidden in lengthy disclosure statements which is why asking for clear verbal disclosures from your advisor is essential.

 Red Flag #14: Short-Sighted Investment Strategy  

At face value, investment performance may seem like a reasonably straightforward measurement. Most investors look at their investments for the percentage of increase or decline in the total aggregate assets within an investment account. However, a short-sighted investment strategy can have long-term repercussions.  Frequent short-term trading can have a significant impact on your taxes. Securities you’ve held for less than a year get taxed at higher capital gains rates, which add up quickly over time. Too often, advisors lack conviction and want to prove their prowess in the markets by actively trading in the short term.

Red flag #15: They’re Boring

Your financial advisor should be a good communicator.  You’re not going to be motivated by someone who’s not engaging or able to explain things clearly.  Even if your advisor is a verified expert, if they can’t convince you to follow their advice, you’re not going to get results.

Have Questions?  Contact Us!

References

Sarsi.  “Financial Advisor Red Flags: When to Walk Away From Your Advisor”.  Financial Advisor Red Flags: When To Walk Away From Your Advisor (sarsillc.com).  February 10, 2024.

Geresi, Jack.  “Thinking About Hiring a Financial Advisor?  Here are 9 Red Flags to Avoid.”   Thinking About Hiring a Financial Advisor? Here are 9 Red Flags to Avoid… (wjohnsonassociates.com).  November 14, 2022.

Booton, Jennifer.  “7 red flags that signal it may be time to dump your financial advisor in 2023.”   7 red flags that signal it may be time to dump your financial adviser in 2023 – MarketWatch.  January 12, 2023.

Rock House Financial Advisors.  “7 Warning Signs You May be Working with the Wrong Financial Advisor.”  The Wrong Financial Advisor: 7 Signs (rockhousefinancial.com).  February 9, 2024.

Ma, Myles.  “5 red flags when picking a financial advisor.”  5 Red Flags When Picking a Financial Advisor – Policygenius.  December 8, 2021.

The information in this article is general in nature and for informational purposes only.  None of this information is intended to be personalized (and tailored to an individual’s unique circumstances) and should never be construed as specific tax, legal or financial recommendations.  Before making any financial decisions, you are strongly encouraged to first consult with a qualified financial professional.

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