by Lauren Aimes
Paladin Registry has helped thousands of investors find the best financial advisor to work with. Unfortunately, many of these investors have come to Paladin because an advisor they were referred to by a friend or thought was the best, did not work out. The advisor was unethical or was unable to produce the results promised. These are common Paladin Registry complaints.
Making the mistake of working with a bad financial advisor can be costly. So, how do you know if you’re working with a bad financial advisor, and what do you do about it?
During the interview process, a financial advisor will naturally try to do his or her best to convince you that he or she should win your business. So it’s crucial that once he or she is hired, you must determine whether your advisor is providing you with the advice and services you need to reach your investment goals. This can be a difficult task.
Some very bad advisors have great personalities, sound convincing and are easy to get along with. However, these personal traits don’t by themselves indicate that an advisor is competent or ethical. In fact, the advisors who are most dangerous to your wealth are those who can put up a great front and convince you that they have your best interests in mind, when in fact they are really focused on feathering their own nest, or simply don’t possess the knowledge and skill to provide you with the assistance you need to achieve your financial objectives.
Possible Advisor Red Flags
To make it easier to separate good advisors from bad advisors, some potential advisor red flags are listed below:
- Licensing: Be cautious of advisors who only possess a Series 6 or Series 7 license. These licenses allow a broker, or registered representative, to sell products for commissions, but not to charge for financial advice on an hourly or Assets Under Management (AUM) basis. While they may represent themselves as financial advisors, they are actually sales representatives.
- Compensation: Be wary of so-called “financial advisors” whose only method of compensation is commissions. To truly be thought of as an advisor, financial professionals should be compensated by fees rather than commissions.
- Insurance agents: Many insurance agents also sell investment products, but that doesn’t necessarily mean you should buy securities from them. Selling insurance and providing investment advice and management services are two different things, and the former does not necessarily qualify an agent to do the latter. Insurance companies, however, look to generate revenue from any product their reps can sell, and investment products are just one more way to earn additional revenue from their customer base.
- Bank Representatives: Caution is warranted when considering hiring a bank rep to manage your investment portfolio. To generate more revenue, banks often staff their branches with reps who are just starting out in the business or are not of the highest quality to sell you products.
- Fake Credentials: A distressingly high proportion of reps and “advisors” resort to fake credentials to try and make you believe they are more qualified than is actually the case. Don’t let yourself be taken in by a long list of letters after a name. Look for evidence of high-quality credentials, which require that the advisor fulfill stringent prerequisites, pass proctored tests and attend continuing education. To verify an advisor credential, use Paladin’s free “Check a Credential” service.
- “Free Lunch” Seminars: The saying, “There are no free lunches,” holds true with regards to advisor seminars, whether or not a free meal is provided. Both a free lunch meeting and a seminar are simply methods an advisor can use to meet you in order to get the sales process started – the purpose of which is to sell you their products or services. The same holds true if an advisor offers a “free” financial plan. The goal of doing so is typically to use the plan to sell you products. Remember, nothing is free if an advisor is looking to sell you something.
How to Monitor Your Advisor’s Performance
Many investors have not put in place processes that enable them to monitor their advisor’s performance. As a result, they are often forced to rely on advisors to monitor themselves, giving their advisor control over the performance metrics they see.
It is no stretch to assume that advisors are highly unlikely to go out of their way to make sure you receive data that would likely result in termination. They are more likely to withhold such data, leaving it up to you to find it yourself. To do so, you need to know the right questions to ask and be able to distinguish between good and bad answers.
Adequately monitoring your advisor’s performance should provide you with the relevant performance data you need to add accountability to the process and motivate your advisor to communicate useful and factual information and offer competitive results at reasonable levels of risk and expense.
Each dollar you pay in the form of investment expenses taken out of your investment accounts reduces the amount of money you have for future use. This is why it is important to closely monitor the expenses you are paying in relation to the services and performance your advisor is providing to ensure you are receiving the type of value you expect from your advisor.
Attempting to boost performance by taking on too much risk can result in serious damage to your ability to meet your investment objectives. As a result, your advisor should make every effort to ascertain your risk tolerance and make recommendations that take this into account. Additionally, you should monitor your portfolio’s risk profile to make sure it has not risen over time. If you find that it has, you can inform your advisor that the portfolio needs to be rebalanced.
Check to see if an advisor has been cited in any regulatory agency complaints. Such complaints may be frivolous and thus deserve to be ignored, or they may be more serious infractions that touch on your advisor’s ethics. If they are of this latter type, it is important that you are aware of them so that you can take whatever action you deem appropriate in response. Paladin Registry allows you to search an advisor by name here. Any Paladin Registry complaints will be listed in the advisor’s profile.
If your advisor starts to lose more clients each month, quarter or year than would normally be expected due to natural attrition, this is worthy of attention. Do these other clients know something that you don’t? At the least, you should look into what is causing the client exodus to see if it has any bearing on your situation.
Bankruptcy and Foreclosure
If your advisor has encountered financial difficulties, it may present a problem. What if he or she begins making recommendations based on the need to make money as quickly as possible as a result? To be able to offer high-quality investment advice to others, an advisor should be able to demonstrate competent management of his or her own financial affairs.
How to Terminate/Replace Your Advisor
If your financial advisor fails to meet your expectations when it comes to performance, risk management, expenses and services provided, you may join the millions of Americans each year who terminate their advisors, often to replace them with one who they believe is more suited to helping them achieve their financial objectives.
How do you go about firing your advisor? Should you file a claim? Find another advisor right away? Or try to manage your assets yourself?
The Right Way
There is a method of terminating an advisor that reduces your exposure to unnecessary risk and expense. There is also a wrong way.
A Friendly Adversary
Your advisor is likely to be quite charming and friendly while he or she is earning money from your assets. However, once you terminate the relationship, this is no longer the case. If you take the next step and file a claim against the advisor due to your belief that their actions have been unwarranted or unsuitable, you are now dealing not with a friend but with an adversary.
It is not illegal to give bad advice. If an advisor truly believes the advice he or she gives is in your best interest, there is no regulation that says that the advice must also be good. You must take on the responsibility of determining if an advisor is a real financial expert.
While it is rare, some advisors (think Bernie Madoff) do engage in illegal activities, including unregistered advisors selling investment products that are, in reality, illegal scams. If you fall victim to a scheme of this type, contact the FBI or local law enforcement immediately to report the activity.
Most Frequent Claims
The three most common claims logged against advisors are:
- Unsuitable investment recommendations
- Lack of supervision of registered representatives
- Lack of due diligence for investment products
If you have suffered damages from an advisor, you can choose to walk away, or you can decide to file a claim. If you plan to make a claim, be sure to speak with a securities attorney prior to terminating the advisor. Advisors and the firms they work with employ anti-investor business practices to attempt to minimize their liability from any claims.
All financial service agreements contain a clause that requires that any disputes are handled by an arbitration process run by FINRA. If you have chosen a competent attorney and have a legitimate claim with supporting documents, you have a one-in-three chance of winning some percentage of what your claim asks for. If you win your case, FINRA’s statistics show that 92 percent of all claims are settled with an average settlement amount of 37 percent.
There are hundreds of law firms based in the U.S. that specialize in securities law. Many of these firms focus on filing legal claims against Wall Street firms and advisors on behalf of investors, either on a national or regional basis. Before filing any claim, speaking with a securities attorney is recommended.
Selecting the Right Advisor
Whether you are looking to replace your current advisor or select an advisor for the first time, picking someone who understands your financial situation and has the necessary expertise to help you reach your financial goals is the primary objective. Referring to the red flags listed above in the selection process can help you avoid picking the wrong advisor.
Remember to focus on investigating your advisor’s credentials, past investment performance and personal financial and regulatory history rather than on their personalities. Taking this approach can help you reduce the chances of selecting an advisor who can “talk the talk” when it comes to presenting himself or herself as a financial expert, but who lacks the expertise to “walk the walk” and actually deliver on the claims he or she makes.
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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.