Is Your Financial Advisor Giving You Bad Advice?

Bad financial advice can cause you to defer your retirement date, reduce your standard of living during your retirement years, and run out of money late in life. It is common sense that bad advice should be avoided at all costs.

However, you have to be able to identify bad advice to avoid it. This is easier said than done. You will need data and hindsight. For example, you get a quarterly performance report that shows you lagged your benchmark by several percentage points. Or, you find you are paying expenses that are so excessive, they are undermining your ability to achieve your financial goals. By the time you have this information – you have already lost money.

Source of Bad Advice

If you are like most investors, you do not have enough investment knowledge to second-guess the advice of your financial advisor. You tend to buy what the advisor recommends. After all, that is why you have an advisor – he is the expert.

However, bad advisors are the source of bad financial advice. It is much easier to learn how to avoid bad advisors than it is to learn how to be your own financial advisor.

Personalities

You cannot avoid bad advice by rejecting advisors you don’t like. Most advisors have positive personalities that they use to develop relationships. They know you trust people you like. And, trust facilitates the sale of financial products. Personalities are not a substitute for competence and ethics.

There is an irony here. Many of the best advisors do not have the best personalities. They are intellectual, quantitative, and analytical. These traits make them great advisors, but you may not want to play a round of golf with them.

Sales Tactics

The lower the quality of the advisor, the more likely the advisor will use sales skills to convince you to buy what he is selling. This is the only way he can make money from your assets.

Following are the five most frequently used sales tactics that low quality advisors use to deceive investors. They:

  1. Use fake credentials to sell themselves as experts
  2. Claim they are trustworthy so you do not question their advice
  3. Use coached references to convince you they are trustworthy
  4. Provide fake track records to create performance expectations
  5. Avoid documentation so you have no record of what they say

Avoid Bad Advice

The best way to avoid bad advisors is to follow two principles.

Principle #1. You only place importance on factual information that impacts the advisor’s competence and ethics:

  • College degrees from accredited institutions
  • Years of financial service experience
  • Quality certifications (CFP, CFA, CIMA, CPA)
  • Clean compliance record (FINRA.org)
  • Acknowledged fiduciary (highest ethical standards)
  • Fee-for-service compensation

Principle #2. Minimize the impact of personalities and sales pitches on your selection decision. Require documentation for key facts so you have a record of what was communicated to you. Prudent investors trust what they see and not what they hear.

Following your principles and avoiding sales tactics will drastically reduce your risk of receiving bad financial advice.

Bio: Jack Waymire worked in the financial services industry for 28 years. For 21 years he was the president and chief investment officer of a registered investment advisory firm with more than 50,000 clients. He left the industry in 2003 when his book (Who’s Watching Your Money?) was published by John Wiley. That same year he launched an investor information website that was based on the principles in his book. Jack is a columnist for Worth magazine, a frequent blogger on major financial sites, and widely quoted in the media including the Wall Street Journal, Forbes, BusinessWeek, Bloomberg, and Kiplinger.