They are here, all around you. Trying to sell you their latest magic beans to make a profit. They will call you, day and night, with absolutely no clue about your current situation because they only have your name and your phone number in their “database”. They don’t know who you are, and they don’t care, all they see is money and the short-term commitment between them and their clients.
Every month I receive emails from people looking to find an advisor to look after their finances. And when I ask “Do you currently have a financial advisor?” – the answer is often: “Yes, but he’s not very good”. Likely they took a while to realise this, and sometimes they unfortunately realise when it’s too late.
So here are the warning signs of a bad financial advisor. Don’t waste your time with one. If you are in doubt, get a second opinion.
1. He offers solutions before having a comprehensive view of your personal situation.
We’ve outlined the importance of comprehensive financial planning extensively in our past articles. In summary, there is no such thing as ‘a good investment’ or ‘the right solution’. The most attractive investments and best solutions for you depend on your personal situation and objectives. So if your advisor is proposing solutions without knowing how old you are, what you do for a living, what your family situation is, what your net worth is, what you invest in, how much you make, where you pay tax and what your objectives are, watch out! What would you think of a doctor who offers a prescription without examination?
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2. He sells rather than advises.
The whole objective of having an independent advisor is that they look out for your best interest rather than try to push products (see our article: How to choose a financial advisor). Of course, advisors do have to earn a living, and so they charge a management fee on your funds, or receive a commission on services you buy. That’s normal, and it’s entirely possible for them to look out for your best interest and also receive their fees. However, some near-sighted, or even dishonest, advisors decide to push only products on which they make the highest fees, regardless of their clients’ interests.
How to know if your advisor is a salesman?
Most people don’t save as much as they should, invest more conservatively than they should, and have less insurance than they should. So if your advisor is encouraging you on one of these fronts, that’s probably normal.
But if he is pushing you to make specific investments, or buy specific products from particular providers – especially if they seem uncommon or non-standard, that’s a sign he might have his eyes on an outsized commission for that.
3. He doesn’t give you options
Because there is usually no single right answer when it comes to finances, a good advisor will typically lay out a few options. They may give their personal recommendation, and it may be an emphatic one, but ultimately it’s your choice.
Also, one of the reasons to work with a financial advisor is that they can find the best options from the mind-boggling range that is available in the market. If the options are always very limited, your advisor may be failing to seek out the best investments for you.
4. He doesn’t explain his recommendations or try to understand your reasoning.
This is closely related to the previous point. Good advisors will not recommend one of the options ‘just because’ – they should have reasons, and should be able and willing to make sure you understand them.
They should also listen to you and try to understand your concerns, to determine whether there is a misunderstanding, or whether a different option might better meet all objectives.
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Here are examples of normal options and recommendations:
- “For your equities, here are 3 options of funds from leading providers. I personally recommend Fund X. As you can see, it has outperformed the others every year for the past 5 years, with the same volatility. It is managed by Mr. X, who has 20 years of experience and is well respected in the industry. Fund Y does have lower fees, but would require a higher minimum investment that could be a bit much for you right now. What do you think?”
- “I strongly advise against your transferring your employer-sponsored defined-benefit pension. That’s because to provide you with the same income with your other savings, we’d have to earn a return of 12%, which is virtually impossible with current rates around 2%. If you need cash, I’d recommend taking from your ISA instead. Would you have anything against that?”
5. He doesn’t keep track of your records
Because the right products and services depend on your personal situation, it’s important that your advisor not only ask you the first time round, but stay up-to-date on your situation. Failing to do that is another sign that he is interested in selling rather than advising.
In addition to this, keeping track of how you are doing is one of the standard services of an advisor – part of the reason you have one is so that he can make sure your investments are performing well vs. benchmarks, and recommend adjustments accordingly. Failing to keep your records is a sign that he is not providing an important service. It may also be a sign that he is disorganised, which is also not good.
6. Anything seems too good to be true.
Economics is nicknamed ‘the dismal science’, and one of economists’ favourite sayings is ‘There is no free lunch’. In fact, advisors can bring good news – there are ways to pay less tax, lower fees or make higher returns. But they’re not miracle workers. If you are being promised outsized returns with no risk, run!
These are six of the biggest signs that your advisor may be second-rate, or worse. Your finances are important – so if you have the slightest doubt about your advisor, you have very little to lose by discussing your situation with someone else.
Need help with financial planning? Download our Financial Planning Guide.
