Education is crucial for protecting yourself from possible misconduct from financial advisors. Recognizing these red flags can help you choose wisely and avoid mistakes.
As a dermatologist, you are well accustomed to patients understanding the value of a specialist. They are coming to you, in fact, for help with skin-related medical issues because you have specialized in helping patients take the best possible care of their skin. This seems so obvious it is hardly worth mentioning.
The way things work in the financial world, however, can be anything but obvious. Many dermatologists, at one time or another, have gone to a financial advisor. Using the analogy above, you would expect your financial advisor to take the best possible care of your money. Unfortunately, stories about financial fraud and mismanagement make many investors wary of financial advisorsâwith good reason. However, itâs important to remember that just as there are financial advisors with dishonest practices, the vast majority truly want to give you the best level of financial care possible. How can you distinguish the good advisors from the bad and protect yourself from financial misconduct?
These red flags will help you learn how to choose wisely by spotting common unethical practices and mistakes people makeâand avoid them.
It can be overwhelming to research and meet with different advisors, so it may be tempting to take the first recommendation you get from a friend or family member. After all, if it worked for them, it will work for you, right?
Not necessarily. You have no way of knowing what kind of relationship this person has with the financial advisor or even what they value in an advisor. And since each financial plan, planning process and investment portfolio is different, an advisor that meets your friend or family memberâs needs may not be able to meet yours.
You should still do your own background check on your financial advisor. If they are accredited, verify their accreditation. Also ask the advisor about fees and to identify his or her licensing or supervising organizationsâdepending on the type of financial professional, this may be the CFP board, FINRA, the SEC or a different organization. Using the organizationâs website will allow you to do a more thorough background check and see if the advisor has a history of disciplinary action.
Next: Red flags
Your financial advisor should never ask you to write a check out to him or her personally for an investment. Instead, the check should be made directly to the product sponsor, such as the mutual fund company in which you are investing.
If an advisor tells you that he or she will deposit the check and make sure the funds go to the investment, he or she could simply keep the money and then falsify investment statements. If an advisor suggests this, it is a cause for concern. You should question any situation that involves giving a financial professional unlimited access to money intended for investmentâif youâve found a financial advisor that puts your needs ahead of theirs, this shouldnât happen
If a financial advisor offers to complete any type of financial form âto make things easier for you,â insist on doing it yourself. At worst, a dishonest advisor could falsify your information. At best, a careless advisor with good intentions could make an error on the form.
This can be dangerous if your income or net worth is misrepresented, as it could make you eligible for investments that arenât suited to you, leaving you open to financial loss. Avoid leaving blanks on any financial document youâve signed, and ask your advisor to send you copies of final documents so that you have evidence of their accuracy should anything occur.
Take pause if your advisor offers you some sort of âspecialâ investment and you notice that he or she is handling the details of this investment differently than in the past. For example, if the advisor wants to meet outside of his or her office to discuss it, or if the investment letter appears on different stationery or with a different logo; these may be signs that your advisor is selling an investment the employer doesnât know about and/or supervise.
If so, ask the employer/company directly whether it approves of the investment. If your advisor is a sole practitioner, verify that he or she carries professional liability insurance. Without verification that the investment is legitimate and supervised by the company, you may be unable to make a legal claim should the investment go bad.
Remember that investments should always be regulated/supervised by an independent third party and the risks and possible conflicts of interest fully disclosed to the investor.
You should receive regular investment statements from someone other than your financial advisor, such as the custodian of your assets or the brokerage firm that handles your investment. As an example, the custodians that my firm uses to provide independent reports include Charles Schwab & Co. and TD Ameritrade, among others.
If you receive reports from your advisor, make sure they match with these third-party reports and bring up any discrepancies immediately. If you have any investments that arenât evaluated frequently or held by a third-party custodian, verify that the investment manager is audited frequently by an independent accounting firm.
As a financial professional, beating the market is an admirable accomplishmentâbut no one can promise you that theyâll be able to achieve it. Itâs rare to actually outperform the market, and chances are that an obsession with doing so will cause an advisor to seek out higher-risk investments to make it happen.
If your advisor pitches investments to you that have high returns with no risk, they may be hiding other costs. Make sure you are getting a fair and comprehensive description of an investmentâs pros and cons, and if you find that youâre only hearing the pros, you may want to reconsider. Ask what circumstances would cause the investment to perform worse than projected, and consider changes in both the economy and your own personal circumstances.
Overall, you should make sure that investment discussions are focused on your specific needs and how a certain investment can meet those needs, not simply on why this one investment is the greatest of them all.
Whether your advisor is asking you to make a decision about an investment or policy in a very short time frame or approaching you with a major financial decision just after a devastating life event, such as death or divorce, remember that you are still in control. You should be cautious of any pressure tactics during a major life change, when your decision-making ability may be compromised.
If this is the case, you may want to find an advocate, such as a close family member, to help you with any urgent financial decisions, such as tax deadlines. On less urgent decisions, it may be best to wait for a while until youâve had some time to heal mentally. If you feel your advisor is trying to rush you into any kind of decision, speak up. Make sure you know your advisorâs fee structure and look into if your purchase of a policy or investment in a certain time frame will give a generous kickback.
You should also remember that many insurance policies or annuities offer a âfree lookâ period, which gives you a window to back out without incurring penalties.
Your advisor should recognize that financial decisions are important and give you the time and space necessary to make them; if not, ask yourself whether he or she truly has your best interests in mind.
Many people think if they have a financial advisor, they donât need to be educated about finance. However, you need to at least know enough to be able to assess if your advisor is helping you.
If you donât understand something, ask. Your advisor may have completely ethical intentions but simply not know that you donât understand him or her. Itâs the advisorâs job to make sure you understand any advice given to you, but an advisor canât do that if you claim to understand something when you donât.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
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