Three Red Flags: How To Avoid Bad Financial Advice
Three Red Flags: How to Avoid Bad Financial Advice
Every month, FINRA (the Financial Industry Regulatory Authority) releases disciplinary actions taken against firms and individuals for violations of FINRA rules and federal securities laws. For example, in 2024, Damian Mark Baird of Clarence Center, New York, was barred from FINRA firms for altering a $50,000 check a client wrote for deposit into their account. Baird attempted to deposit the check into his own bank account, but the bank's fraud department thwarted his theft. If a client had looked into Baird's registration history, they would have found a record of customer disputes dating back to 2002 alleging unsuitable transactions, misrepresenting or omitting material facts, and engaging in deceptive acts and practices. While bad actors like Baird are rare, investors must be vigilant when hiring financial advisors. Recognizing the red, yellow, and green flags can help you make informed decisions about your financial future. Here's what to look for and avoid when seeking financial advice.
Green Flags: Signs of Reliable Financial Advice
- Fiduciary Responsibility: Ensure your advisor is a fiduciary, meaning they are legally required to act in your best interest. This commitment is crucial for trustworthy financial guidance. Be wary of dually registered advisors who are not legally required to act as a fiduciary only and always.
- Team Approach: Advisors who work collaboratively within a firm can provide more comprehensive advice, drawing on a range of expertise.
- Proper Registration: Check your financial advisor or firm's registration with FINRA or the SEC. This registration is a baseline for legitimacy and accountability.
- Clean Record: Look up your advisor's ADV Search report. No severe violations or disciplinary actions should be present.
- Regular Meetings: A proactive advisor will schedule at least annual meetings to review and adjust your financial plan.
- Responsive Communication: Your advisor should be easy to reach and responsive to your queries, ensuring you feel supported and informed.
Yellow Flags: Proceed with Caution
- Initiating Contact: If you always have to reach out first, it may indicate your advisor's lack of attention to detail.
- Excessive Trading: Frequent buying and selling can rack up fees and suggest the advisor is more interested in commissions than your financial health.
- High-Cost Investments: Be wary of advisors pushing mutual funds or annuities with higher-than-average costs, which can erode and limit your returns over time.
Red Flags: Time to Seek a Second Opinion
- Unregistered Advisor: An advisor not registered with FINRA or the SEC is a major red flag and warrants a conversation.
- Lack of Contact: If you have not heard from your advisor in three years or more, it's a sign of neglect. If they don't answer their phone or respond to emails, it's time to look elsewhere.
- Dismissive Attitude: Advisors who dismiss your concerns with vague reassurances like "don't worry about it" are not respecting your need for clarity and understanding.
- Misaligned Investments: If your investments don't match your risk tolerance, it indicates a lack of personalized advice and may not comply with the Regulation Best Interest standard of care.
- They can't explain their fees clearly: Financial advisors receive compensation through fees, sales commissions, or both. Be sure to ask how your advisor gets paid, about hidden fees, and if he or she receives kickbacks or commissions from third parties.
If you notice three yellow or red flags, seek a second opinion. If you are considering switching advisors, you are not alone. According to a PwC survey, nearly half (46%) of high-net-worth investors in the U.S. plan to change or work with a different wealth management firm within the next 12 to 24 months. High-net-worth investors today deserve a high level of care and attention and are therefore reconsidering their wealth management relationships in favor of personalized experiences, responsive services, and better digital capabilities.
Next Steps
The financial industry continues to publish and promote material and disclosure documents to help investors stay safe, but the quality of financial advice still varies wildly. By recognizing these red, yellow, and green flags, you can ensure your financial advisor is aligned with your best interests, helping you secure a prosperous future. If you want a complimentary second opinion, contact the fiduciaries at Hurlow Wealth Management Group by calling 812-333,4726 or clicking here to schedule an introductory call today.