Five Financial Advisor Red Flags

Here's a guest post from Jeremy at 401k Rollover IRA info.

Should you drop you financial advisor? Five red flags to look out for.

1.) When is the last time you've talked to him?

Better yet, when is the last time he has called you? A good advisor should be keeping in touch with his clients at least once every six months to review the account, and if you have questions you should be able to reach him within a week. Talking to his assistant about making a withdrawal doesn't count.

2.) When you do talk to your advisor, does he always reccomend you change things or push you to invest in a certain product?

• More specifically, does he reccomend you sell stock but keep your mutual funds as is?

• Advisors make commissions on each stock trade you place, but they make money on mutual funds as long as you're in them due to commission trails. Part of the mutual fund internal expense goes to them, so it's in their best interest to keep you in them.

• Also, watch out for the advisor that pushes annuities. Advisors also make more selling annuities than most other products. If you advisor tells you to invest in an annuity, make sure you ask for a prospectus and do some research on the underlying expenses.

3.) Look at your investments.

• Are most of them proprietary products? This means products owned by the firm he is with. For example: if you have a financial advisor with XYZ firm and he sells you XYZ mutual funds or XYZ annuities, you may want to look elsewhere.

• The reason for this is that advisors usually get paid higher for selling proprietary products and their firm may even push them to sell these. For the most part, you can find a better performing investment than something owned by that firm.

• Check the internal fees on your investments compared to other products. If they are higher than most, he is probably making more money on them as well.

4.) Do a FINRA broker check on your advisor.

• FINRA is the regulatory body (formerly known as the NASD) that governs brokerage firms.

• Go to http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm to perform a broker check. The only information you need is his name. All written complaints filed by clients will show up here.

• One or two complaints shouldn't raise a lot of concern (especially if he's been in the industry for a number of years), but if you see a laundry list that should be your cue to leave.

5.) Does he dance around questions or try to control the conversation?

• If you're worried about why your account was down 37% last year then ask him straight up, and don't hang up until he provides you with a suitable answer. That is his job.

• If he doesn't know the answer or cannot provide you an answer you think is suitable, look elsewhere. There is nothing saying that you have to keep your money with this person.

Advisors are around to look out for their client's best interests. However, there are always people out there that look out for themselves first. If you see a lot of the red flags discussed here, it may be a good idea to get a second opinion.

Comments

[The Weakonomist]

The biggest red flag I always look for when recommending people is compensation. Do YOU pay him or does an investment company pay him with commisions. You want someone that you pay. Your interests will be alligned only if you are paying him.

[Ken]

I would also want him/her to be willing to explain my investments in everyday terms. I do think it's important that they initiate regular contact as well

[TStrump]

I'm always wary of advice from someone who is making money from you.
The only way to ensure objectivity is to somehow take money out of the equation.

[Neal Frankle]

I'm ok dealing w/a professional who makes money from me - otherwise, how could they help me?

What I want to sense is that the professional is focused on helping me rather than themselves. These are good tips. I also think the "gut check" is helpful.

[financial advisor]

Unfortunately, in the aftermath of Madoff, the advice has to go back to even more basic- if it sounds too good to be true, then it is. Many people DID avoid Madoff because they couldn't understand how he was generating his returns.

Next, many people avoided Madoff because your account with him was held at his own firm, not at a third party like Fidelity, State Street, or Schwab. Most investment advisors hold your actual securities at a firm like one of those, so your securities are still okay if the advisor goes under.

Also, the SEC regulates investment advisors so check there if they are an investment advisors, as opposed to FINRA if they are a financial planner with a brokerage firm. However, neither background check is 100% reliable.