What to Ask Your Potential Financial Advisor

How to check if your financial advisor is on the level or just after your money: Internet Scambusters #406

Anyone can call themselves a financial advisor. They don’t need specific qualifications and they don’t need to be registered.

So, when you’re seeking guidance and support on your investment strategy, how do you know they’re not just amateurs or even scammers?

In this issue, we list 10 warning signs to watch out for and 10 questions to ask your would-be advisor.

On to today’s main topic…

10 Warning Signs And 10 Questions To Ask When Seeking A Financial Advisor

When it comes to managing their financial well being, many people, especially seniors, turn to the services of a financial advisor.

It seems to make sense, since they’re the experts with your well being in mind, aren’t they?

But here are a few startling facts:

  • A study by securities officials of “free meal” financial investment seminars, found that half of them exaggerated or made misleading claims about their services. More than 10% were actually fraudulent, selling non-existent products or promising unrealistic returns.(See this Scambusters report, Scams Against Seniors: Don’t Get Fleeced Out Of Your Golden Years, for more about these seminars.)
  • Anyone can set up shop and call themselves a financial advisor or planner, without either experience or qualification. You don’t even need a high school diploma!The terms are considered to be generic (in general use) and usage is not controlled by federal or state governments, or by the financial regulatory bodies.(The term “investment advisor” is somewhat different; people using this term should be registered with the Securities and Exchange Commission, the SEC.)
  • According to money experts at MSN, the Microsoft Network website, of the quarter-million people using the title “financial planner,” only about 22% were holders of the industry standard designation — the Certified Financial Planner mark.

In some cases, a financial advisor may actually claim to have professional qualifications, when in reality these are invented or based on a home study course that took as little as two hours to complete.

They may actually be honest business people but simply lack the training and experience to help guide your financial strategy.

Others may operate inside the law but either provide a poor service or be less than honest about how much money — in the form of fees — they’re making off of you.

But in a worst case scenario, they could be operating financial advisor scams that transfer your money straight into their pockets.

Naturally, we’re not suggesting that all financial advisors are scammers. Mostly, they’re not and many undoubtedly provide a valued service to their clients.

The trouble is that it can be difficult to tell the difference between the good and the bad.

Financial Advisor Warning signs

However, there are some warning signs that should put you on alert about the qualifications or integrity of a supposed financial advisor you’re thinking of dealing with.

For example:

  1. They suggest liquidating all or a substantial part of your portfolio and putting the proceeds into a single product (often an annuity, on which they receive a generous commission).
  2. Following on from the above, they push a single type of investment and don’t seem to be interested in exploring your needs and personal risk preferences.
  3. They tell you the investment is only available through them. Even if this were true, you can’t realistically place a true value on this type of investment and it almost certainly would make it difficult to cash out.
  4. They offer a contract that includes taking a share of any financial gains you make (but, of course, they don’t share in any losses!).
  5. They seem to be focused on one area of finance, do not seem widely experienced in different types of investments and are unable to compare them intelligently.
  6. They refuse to detail their fees or tell you how they earn their money (i.e., whether they get bonuses or commissions for selling specific products to you).
  7. They ask you to pay in advance for their services or to make a check out to them rather than an organization or institution in which you want to invest.
  8. They invite you to make a loan to them or to sign a loan guarantee.And finally, the old chestnuts:
  9. They promise unrealistic returns on an investment while claiming it is perfectly safe.
  10. They urge you to act quickly.And, if you’re attending or following up on a “free” event, even though there’s a 50% chance it’s not a scam, remember that it is a sales pitch — either for the services of the organizer or for a particular product.Somebody pays for the food and you can bet your bottom dollar that, ultimately, it won’t be the organizer.

Many financial advisor scams are particularly targeted at seniors. And you can read more about this type of crime in earlier Scambusters issues.

Don’t Be Taken In By These 10 Senior Scam Ploys

Investing Safely

Key questions to ask a Financial Advisor

Meanwhile, if you’re planning to work (or are already working) with a financial advisor, here are 10 key questions to ask that will give you clues to their true status:

  1. What are your qualifications? They key ones are Certified Financial Planner (Professional or Practitioner), Certified Public Accountant, Personal Financial Specialist, a Chartered Financial Consultant or a Chartered Financial Analyst. Ask to see their certification and, whatever they claim, check it out online. See this interesting article about phony official titles: FINRA Announces Regulatory Sweep on Meaningless Senior Specialist Designations Used To Hoodwink Seniors.
  2. How do you earn your money? Fee-only is best (usually either an hourly rate or a sum related to the size of the portfolio). Beware of the phrase “fee-based” — this may mean they also get commission. Or if they say “by salary,” ask if they also earn a bonus for selling particular investments. It’s all right for a financial advisor to earn a commission, as long as they tell you that’s what happens.
  3. Can you provide references of longstanding clients I can contact, and can I see examples of financial plans you have drawn up for other clients (with their personal information obscured, of course)?
  4. How many clients does your organization have and how many do you personally have? Anything above 100 or so for the individual you’re dealing with would suggest he can’t devote the time you need and may be more focused on selling commission-based products.
  5. How long have you been doing the job and do you have evidence of this? Just because someone appears older doesn’t mean they’ve been in the biz a long time. Fielding mature-looking front men is one of the financial advisor scam tricks.
  6. Are you registered with FINRA (the Financial Industry Regulatory Authority), the SEC or a state licensing body? (Again, check this out with the relevant bodies — FINRA and SEC.)If they claim to be registered with the SEC, ask to see their ADV form — a requirement of registration in most cases — which tells you more about the firm.
  7. Are you a member of any professional trade organizations, like the National Association of Personal Financial Advisors? Can you explain its code of ethics? Again, you can check this with any organizations they name and check the credentials of the particular organization by doing a Google search on the name.
  8. Do you have wide general knowledge of the different products and services in the financial sector? If so, please give me a broad overview of the advantages of each. If not, are you only able to advise in a specific area (insurance or tax for example — which is probably not what you’re looking for)?
  9. Have you ever been the subject of formal complaints, sued by a client or disciplined by a regulatory body?
  10. Do you mind if I think things over and talk to a couple of other financial advisors? (If they object or seem agitated or uncomfortable, take your business elsewhere.)

Some of these questions might seem a bit blunt. But remember, it’s your money and your future prosperity you’re seeking to protect.

As we have previously suggested, it’s often a good idea to get recommendations on a financial advisor from other people you know and trust.

As suggested in Question #10, you may also want to speak to two or three different financial advisors, to compare not just their knowledge and expertise but also to see if the chemistry is right.

And, no matter how much you trust your financial advisor, always keep a close and regular eye on your investments and act swiftly if you suspect things are not right.

Time to close — we’re off to take a walk. See you next week.