Financial advisors can help you build your portfolio when you don’t want to fly solo on your investment journey. But are all advisors created equal? And what should you look out for?
Help
I understand that investing can be really intimidating when you are just getting started. There is a lot of information out there which can be quite overwhelming. For this reason, beginners often seek the help of a financial advisor.
That’s a good reflex because you cannot be an expert at everything. If you are unsure and unwilling to enter the stock market by yourself it’s an excellent idea to get the advice of a professional. However, as with everything, there are both good and bad financial advisors. Unfortunately a lot of beginning investors have fallen victim to fraudulent advisors, or simply advisors whose knowledge was lacking.
10 red flags to look out for in financial advisors
If you spot one or more of these red flags: RUN.
1: The temptation of huge returns
“70% return on this investment.” “Double your money.”
It’s really tempting to believe the promise of high returns. You’re probably calculating in your head what you could do with all that money (hello first class ticket to Thailand). But if something sounds too good to be true, it probably is. Returns that are ways higher than the market average are rarely to be trusted.
2: A guaranteed result
Whenever a financial advisor tells you that a certain product’s result is guaranteed, get up and leave. No matter how much experience and knowledge they have: nobody can look into the future. It’s true that not all stock market products come with the same risk and some are safer than others. But a good advisor never makes a promise they cannot keep.
3: Not asking about your financial situation
Every good investing decision starts with knowing your current financial situation. For example: you cannot invest aggressively when you don’t have a buffer. A financial advisor who doesn’t ask about your finances is a walking red flag, because no sensible decision can come from not knowing the current situation.
If you would try to get rich quickly you would in fact be treating your investments as a bet in the casino, and in a casino the house always wins.
4: Not taking your risk appetite into consideration
One of the first things a beginning investor should do is determine their risk profile. Whenever an advisor neglects to do this, that’s a problem. It’s also a problem when there is a risk profile but the strategy doesn’t align with it. More than often investors are persuaded (or manipulated) into taking more risk than they are comfortable with. That shouldn’t ever happen. The investor has the last say.
5: Getting rich quick
Believe me, I too would love to double my money by next month. But it just is not realistic. Investing over a short term is super risky, the results are to be found in the long run. Do not believe a financial advisor when they say they’ll make you rich instantly because they would be lying. If you would try to get rich quickly you would in fact be treating your investments as a bet in the casino, and in a casino the house always wins. You beter make peace with the fact that slow and steady wins the race.
6: Asking for your password
Never give away your passwords or login information to your account. It might seem obvious, but don’t forget that scammers are very creative – unfortunately – and they keep coming up with ways to manipulate you into sharing that info. Giving away those details is like handing over the key to your house. Even if you know your advisor personally and you trust them: just don’t. A true professional would never ask this of you.
7: Asking to transfer your money to them
Again, professionals should never ask to do this. Financial advisors should provide you with help in building a strategy and should look for investments that suit your approach best. But all transactions are done from your own account. Do not ever transfer it to their account, because you’ll probably never see your money again.
8: Not listening to your wishes
Every appointment with an advisor needs to start with a conversation about your wishes, dreams and goals. Put simply: your motivation to invest. Do not let a financial advisor push their own goals upon you. Of course they can voice their opinion and give you options you didn’t see before, but in the end it’s your call. Always.
9: Being secretive about fees
You are entitled to transparency about everything, and most of all when it’s about fees. With every option you need to know up front what a certain investment is going to cost you. Are there entry and exit fees? What is the management cost? Is there anything else that could come up? Make sure to get all the information you need – this is a legal obligation by the way – before proceeding with a transaction.
10: Not taking the time to give you a detailed explanation
Time is money, that goes for everyone. A financial advisor earns money by selling their guidance and they have every right to do so. But if they are trying to rush you in order to see more clients: hit the brakes. You deserve a proper explanation about what is going to happen with your money. It’s a matter of mutual respect.
What to do about red flags?
What do you need to do when you recognize one or more of these red flags in your financial advisor?
- Ask questions: don’t be afraid to keep on asking. You won’t come across as dumb, you deserve to be informed correctly.
- Don’t be intimidated: do not let complex terminology or a cocky attitude intimidate you. Remember that you are the client and the advisor is not the boss of you.
- Get educated: this is hands down the best way to armor yourself against bad advisors. Once you have a basic knowledge of how the stock market works you will know what to look out for. Consider it a protective layer to filter out what doesn’t help you.
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