From why you could need a financial advisor to what makes a great advisor, we rarely discuss the bad guys. What does a bad advisor look like? Let’s have a look at the red flags that you should look out for.
It’s important to understand that there are two boxes your advisor should always check. First, your financial advisor should have the necessary credentials (Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) are preferred) and a clear record. While it may seem obvious, Zoe research revealed that 3% of dually registered RIAs had investment related violations.
If you notice either of the above lacking, steer clear. Once both of the above are checked off, evaluate the quality of your partnership.
Does your financial advisor do any of the above?
1. They push annuities and whole insurance products
It happens all the time: a client meets with an advisor and they seem to circle back to whole life insurance again and again, despite the client’s initial inclination not to buy it. This could be a sign that the advisor receives a high commission from the sale of that product, and is not acting in a fiduciary capacity. Our advice: ask the advisor point-blank if they receive any compensation if you buy that product. By definition, if they get a commission from any sale of the product, the advisor’s incentives are not aligned with yours. It means that their end goal is not necessarily to recommend the products that are best for your specific situation, but rather the products that pay the most. Read here for more on typical financial advisor fees & costs.
2. They don’t return your calls or reply to your emails
A good financial advisory practice is client-centric, which means that the client is the center of their universe. Part of this is ensuring a clear line of communication that’s coupled with a professional manner and timely responses. Any advisor that doesn’t make you feel like their most important client should get the boot. Your needs, your goals, your finances – that’s what they should be focussed on. This brings us to our next point…
3. They’re inwardly focused
A bad financial advisor is inwardly focused, whereas a good financial advisor is outwardly focused. What does this mean? Bad advisors ask themselves what they can gain from you as a client and focus on what their priorities are. An outwardly focussed advisor will rather ask themselves what your needs are, “how can I help my client?”. The focus should be on you. Always. Not the advisor.
4. They self-clear and don’t work with a third-party custodian
A custodian is the financial services company that maintains electronic records of financial assets or has physical possession of specific securities. Although it may sound like having a third party involved in your finances is a bad thing, it is actually a good (and essential) thing. Why? Two words: Bernie Madoff.
Bernie Madoff was able to pull off one of the most devastating instances of fraud because he was both an advisor and custodian. As an advisor who also takes custody of your assets, they generate the account statements and therefore have a much greater ability to create falsified documentation. Bottom line: you want an independent third party custodian involved. Now if your advisor clears through a tiny custodian that is not great news either. The custodian should be a brand name that has been in business for years. The four biggest custodians that work with independent advisors are Charles Schwab, Fidelity Institutional, Pershing and TD Ameritrade.
5. Too big an ego
Most people do not work in the finance industry and aren’t up to speed with financial jargon and terminology. This means that most financial advisor clients (especially when they’re just getting started) have a lot of questions. An advisor that doesn’t like (or even encourage) questions should be treated with caution. Even worse, is an advisor that gets antsy when you challenge them. A good advisor who knows their stuff and has adopted a client-centric approach should ALWAYS hear you, consider your thoughts and come back with a clear explanation of the why. Similarly, when things don’t go as planned a bad advisor will make excuses. A good advisor will take responsibility for their mistakes or lack of delivery. Open and honest, that’s what you’re after.
6. They always agree with you
A people pleaser can be a red flag. If your advisor never disagrees with you and simply follows your instructions like a puppet, you should worry. The reason one hires a financial advisor is for their expertise in managing your finances holistically. Each and every suggestion that you make should be considered with that in mind. Absentmindedly doing what you want to avoid conflict can be as destructive as ignoring your needs altogether.
7. They talk TO you instead of WITH you
The key to a healthy relationship with your advisor is exactly that – a relationship. There is a big difference between taking advice and taking control. You want to take control and in order to do that, you need to have an open and honest, two-way relationship with your advisor. An advisor that uses buzzwords and lots of jargon, and who avoids a dialogue is a worrying sign. Similarly, if your advisor talks down to you, it is never a good sign. As we mentioned, almost everyone that works with a financial advisor has a somewhat limited knowledge of the industry. Unless you work in finance (and even this is not always the case) you may never have come across certain terminology, processes or products… AND THAT’S OK. A good financial advisor should have the skill to explain the ‘financy’ stuff to anyone, no matter what their level of knowledge. If not – they’re not going to add much value to you.
8. They see investments as the navigational system
Investing is only the engine of a financial life, not the navigational system. The client sets the goals to navigate toward. A good financial advisor is like having an elite household CFO that looks at your financial planning life holistically, incorporating risk management, budgeting, taxation, estate planning, and investments. This personal finance black-belt assesses your current financial situation, considering your short and long-term goals, to determine the most efficient way of allocating resources to achieve them. They are not solely an investment manager. A bad financial advisor can hide behind the mask of an investment manager, which means they don’t have to explain the interconnectedness of your financial goals, protection, risk, and investments. If they can’t give you an overall picture of WHY they are investing your money the way they are (which should include the strategy to achieving both your short and long-term goals) they aren’t doing a very good job.
Said Yes To Any of the Above? Fire!
Your relationship with your financial advisor is an important one. You need to feel comfortable being open and honest with your advisor, and with them being open and honest with you. The wealth management industry has so many options, that often it can feel daunting to make a change. Remember that any advisor that makes you feel unimportant, unheard, scared to ask questions or pushed to use products you don’t think you need, should be questioned.
Breakups can be tough… How To Fire Your Financial Advisor.