Watch for Red Flags When Working with a Financial Advisor
Everybody has heard the stories about big-name entertainers (Sting, Rihanna) or athletes (Kareem Abdul-Jabbar, Floyd Mayweather) being taken advantage of by their financial advisors.
Sting’s financial advisor went to jail for six years for stealing $1.6 million from him and Abdul-Jabbar lost millions when his advisor used his money for shady real estate deals. Rihanna settled a lawsuit against former accountants who cost her millions and Mayweather’s money woes are nearly a TKO.
It happens to the biggest stars, and it happens to the little ones, too.
And it can happen to you.
Because of the poor reputation of some financial advisors, people are usually careful about who they choose to assist them with their personal financial management. But, if extremely wealthy people can make mistakes, so can those for whom every dollar counts.
You took precautions when you selected your own financial advisor, maybe you even used our five-question guide in the process, and hopefully you are perfectly happy with the way your finances are being handled.
Watch for These 6 Red Flags
If you have any questions about the way your financial advisor operates, here are 6 signs to determine if you are receiving the proper form of financial advice.
1. The Payment Plan is Fishy or Unclear
Obviously, financial advisors charge for their services. They are allowed to make a living, right?
But, if you are uncertain how much you are paying him (if your payments are coming from your account with your advisor), or if you do not understand all the fees that appear on your statement, you need to ask questions.
If we assume most financial advisors are working on the up and up, they will explain their fees in full. If you tell them you feel you are paying too much, good advisors will discuss with you ways to lower your fees while still receiving the services you require.
You need to do some research if your advisor cannot fully explain his fees, or if he is earning commissions on the products or services you are invested in.
Any attempt to avoid explanations on fees and services is a red flag. (Many commission-based investments disappeared after the Great Recession, and it is likely most of your payments to your advisor are fee-based).
2. Negotiating Fees is a No-No (Says the Advisor)
There are generally two fee-based platforms advisors charge: fees based on hours or fees based on a percentage of assets managed.
The fees based on hours can be tricky to understand, but you should encourage your advisor to explain them. Fees based on assets managed are often more expensive, at least on the surface, but you can ask your advisor if there is a way to lower the cost to you.
If your advisor balks at any of these conversations, you may need to consider finding a more responsive financial advisor.
3. It’s Difficult to Get Straight Answers
Does your financial advisor respond to your attempts to communicate with him or her? When you do reach your advisor, do you get the sense that he or she is really listening to you? Has your advisor ever avoided communication with you?
Trust your instincts when you have concerns over the communication habits of your advisor. Keep in mind, you are the boss in this scenario.
You can certainly assess the listening habits of your advisor by looking at how your accounts are being managed. Is there any fee you are paying or service you are receiving you do not understand?
It is in this situation that it is wise to maintain all of your account records from your financial advisor or provider and check them against each other from time to time. Are you paying for too many transactions, or too few? Is your account as active as you want it to be, or as passive as you want it to be?
You certainly told your advisor how you want your finances to be handled. If he or she is not following your wishes, even in a slight manner, you need to have a conversation.
4. The Word on the Street (or Internet) Isn’t Good
Hopefully, before you began working with your financial advisor, you investigated his legal history. It’s easy enough to do.
The Securities and Exchange Commission’s investment Advisor Public Disclosure or the Finra BrokerCheck allow you to insert your advisor’s name into a search engine and it will let you know if any complaints have been filed against your advisor, either from consumers or providers working with that person.
Let’s assume you checked those accounts when you first signed up. It is wise to occasionally check again from time to time. Something could have come up in the last couple of years you need to know about.
This is not disloyalty: remember, again, that you are keeping an eye on the person whom you entrusted with the safety and growth of your personal finances. It is wise to know that your advisor is not carrying any new regulatory baggage.
5. You Feel Pushed Around
Depending on your risk tolerance, you want an advisor to be looking for new and better ways to invest or protect your funds.
But, if in your normal monthly or quarterly conversations with your advisor, he or she begins to push you toward an investment you are unsure of, consider that a red flag. It is possible you’re being encouraged to invest in a product that is better for the advisor than it may be for you.
6. He Hates to be Checked On
Having an active account with a financial advisor is not like having a checking or savings account. The account you have with your financial advisor is more like a living, breathing reflection of your financial standing.
While you may not look at your 401(k) on a regular basis, and you do not know the exact amount in your standard savings account, you need to know what is going on with the assets being managed by your financial advisor.
The people who get ripped off by financial advisors are those who do not pay attention. While you hire an advisor so you don’t have to worry about the growth potential of your assets on a daily basis, you do need to worry about whether your assets are being handled properly on a fairly regular basis.
Advisors doing their jobs properly, will not mind you checking up on them. After all, they know the reputation their profession has, just as well as you do.
Kent McDill is a veteran journalist who has specialized in personal finance topics since 2013. He is a contributor to The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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