The following post was originally published on Wealthminder
I caught up recently with friend. Let’s call him Jake.
Jake is one of those gregarious personalities that fills a room. Everybody who meets Jake immediately likes him, myself included. And, boy, can he talk – out of trouble, into jobs, you name it.
Jake was a B student at a mediocre college. For years after graduating, his history degree failing to land him the high-paying job he hoped, he floundered.
Then, an insurance company hired him to sell annuities. Suddenly, Jake excelled. It didn’t matter that he’d never bought an annuity himself. Or that he didn’t really even understand how annuities worked. He’d had his two days of training. And he knew that he was paid based on one thing and one thing only: the value of annuities he sold.
Jake was always able to put people at ease, to make complex concepts seem simple, to guide them towards a decision they felt was their own. He was a natural salesman. He cranked up the charm. Soon, he was a top regional salesperson, winning company awards and raking in a six-figure salary.
Jake’s title? Financial advisor.
This appalls me – as it should anybody who has sought advice from an “advisor” like Jake. It’s not that Jake is a bad advisor. It’s that he’s not an advisor at all. He’s a salesperson.
Spotting a terrible financial advisor isn’t easy. They look a lot like good advisors. Both have titles that read Financial Advisor and Wealth Counselor and Investment Consultant. But the difference in the advice you’ll receive is night and day.
That’s why we’ve put together a cheat sheet to help you spot the advisors from whom you should keep your distance. Think of these behaviors as red flags. If your advisor exhibits them, do your homework before accepting advice from him or her.
1. The advisor doesn’t discuss fees upfront.
There are several ways advisors might charge clients. Because there isn’t a well-accepted industry standard, good advisors lay out their fee structure early on in conversations with a new client.
When it comes to fees, you’re looking for alignment. Are the advisor’s incentives aligned with you own? Does he or she benefit when you benefit, or when something else happens? An advisor who earns a flat fee – such an hourly rate or a set percentage of your portfolio value – is much better aligned with you than an advisor who earns commissions for selling you particular mutual funds, insurance policies, or other products.
2. The advisor is not a fiduciary.
This is a no-brainer. Fiduciaries are legally required to serve their clients’ interests above all else. It should seem obvious that this is something you should seek in advisor. Unlike in other countries, though, U.S. advisors are not required to become fiduciaries, and many choose not to – often so they can rake in commissions for selling you products that might not quite satisfy the “best interest of the client” standard.
Ask your advisor is he or she is a fiduciary. If the answer is no, find out why. If you don’t like the answer, walk out the door.
3. The advisor recommends you put more than 20% of your investments in gold, commodities, or “alternative” investments.
Different schools of thought exist about how to craft an investment portfolio. Unless you are extraordinarily wealthy, however, no legitimate school advocates plowing more than a fifth of your money into “alternative” investments such as gold, silver, oil, stamps, fine wine, artwork, precious metals, or other off-the-beaten path assets.
There are a handful of reasons an advisor might steer you in this direction. All of them are bad. He might believe he possesses a special ability to time the market or forecast macroeconomic events (he doesn’t). He might receive a commission or kickback for placing clients in these investments (he shouldn’t). Or he might just have no idea what he’s talking about (he should).
4. The advisor guarantees investment performance.
Markets fluctuate unpredictably. The longer the time period, the more likely they are to rise – but nobody knows for certain or by how much. Clients often want an advisor to commit to a rate of return, and advisors may be tempted to tell clients what they want to hear. To do so, however, is more than hubris. It’s unprofessional. And it’s dishonest.
Performance guarantees tend to come in one of two flavors: Either a promise of a specified rate of return or a promise to outperform the market. Both are pernicious – and both betray an advisor’s value. Just as the best lawyer cannot guarantee the outcome of a trial, advisors cannot tame the market’s gyrations. Any indication to the contrary is misleading and should be a red flag.
5. The advisor’s FINRA record isn’t clean.
This is a quick-and-easy check, yet few clients ever do it.
FINRA, the regulatory body that oversees the financial advisory industry, maintains records on every advisor. If the advisor ever commits an infraction, it goes on the record. Advisor records are publicly available. Wealthminder maintains a financial advisor directory you can search to view the record of your advisor. Ask your advisor about any blemishes on her record.
Avoid the terrible financial advisor
It is, of course, much better – and cheaper – to weed out the bad advisors before you hire them. And it’s better still to hire a great advisor in the first place. That’s why we created the Wealthminder Marketplace – to make it super easy to find a high-quality financial advisor. It only takes a couple minutes of your time, so get off your couch and get started today.