Here’s how to tell if advisors' recommendations benefit their bottom line more than yours.
Horrible haircuts grow out, and broken hearts eventually heal. But bad money advice leaves a lasting mark on your bottom line.
Here’s how to spot bad financial counsel — and the folks dishing it out — before any damage can be done.
1. The financial advisor doesn’t act in your best interests
Until recently, there was no legal requirement for those dispensing advice about investing for retirement to put the customer’s financial interests before their own. Crazy, right? Then, came the fiduciary rule — a kind of Hippocratic oath for financial professionals. Financial advisors can call themselves fiduciaries only if they avoid conflicts of interests and charge no more than a reasonable fee for their advice.
Ask those you’re considering hiring if they and/or their firm are a fiduciary (which we recommend). If they’re not, then they merely have to offer advice that is “suitable” for the customer. That still leaves room for conflicts of interest in the relationship, which leads us to the next red flag that should be on your radar.
2. The advisor is cagey about how he or she gets paid
There’s a mishmash of ways financial advisors can get paid. Some make money by receiving a commission or bonus on the products they sell. Others charge clients a percentage of the assets they manage (1% is typical). Charging an hourly rate or a flat fee for services is also common.
The arrangement that has the least chance for conflicts of interest is “fee-only” (which also encompasses the hourly and flat-fee structure). Fee-only financial planners don’t get paid more money for selling you products. That’s a good thing. And if advisors tell you they’re a “fee-based” financial planner, they’re likely referring to a hybrid compensation structure that includes doing work for a flat fee and also getting a kickback on certain financial products.
Ask them to clearly spell out how they get paid. This hybrid compensation structure can contain financial incentives for the advisor to favor certain products over others.
3. The products pitched defy clear explanation
Jargon is the official language of Wall Street and provides a convenient cloak for anyone pitching a shady product, service or investment strategy. But it has no place in conversations between you and your financial professional. Be especially wary of anyone who relies on the “Trust me, I know what I’m doing” method of explanation.
Be especially wary of anyone who relies on the 'Trust me, I know what I’m doing' method of explanation.
That’s not to say that there won’t be a learning curve. (They don’t teach the difference between term and whole life insurance in high school, after all.) But, if someone’s trying to sell you something and can’t — or, even worse, won’t — explain it to your satisfaction, keep your wallet in your pocket and bid him or her adieu.
4. The advisor appears on the “Most Wanted” list
OK, so there’s not actually a “Most Wanted” book of mugshots for bad apples running investment scams. But there are ways to check the credentials of anyone who hangs a shingle to offer money advice.
While it’s not exactly as entertaining as Google-stalking a former flame, the Financial Industry Regulatory Authority, or FINRA, operates a robust database at Brokercheck.finra.org that allows anyone to perform a free background check on brokers, advisors and firms. There you can see an individual's employment history, licensing, regulatory actions and complaints. (There are also links to state-level regulator websites to check on potential insurance agents, certified public accountants, mortgage brokers and more.)
A good rule of thumb: Don’t sign on any dotted line before doing some due diligence.
5. You get that gut feeling
You know that feeling you get when something just doesn’t seem right? Pay attention to it.
Anything that raises the hairs on the back of your neck is fodder for further questioning, whether it’s related to service (someone moving your money in and out of investments without consulting you first), advice (recommendations for things like individual stock picks, bitcoin strategies, time-share condos you didn’t ask for) or interaction style (feeling like you’re not being heard).
Remember, it’s your money that’s on the line, and no one has your best interests at heart more than you.