Red Flags that Should Make You Worry
A financial planner is supposed to help you keep your financial planning on track, but that is not always the case. Knowing how to properly vet a planner will save you time, money and stress.
If your financial planner doesn't keep you up to date on your plan, that is a bad signal. Is your planner contacting you periodically? Is your investment profile updated annually? Those are basic requirements – your financial advisor should be on top of those things.
But what are the signs that maybe you have a bad financial planner? Here are a few red-flags that should cause you to worry:
Churning. If your advisor is jumping you in and out of different stocks and mutual funds regularly, it could be a heavy burden on your wallet (in addition to being illegal by the way). But sadly, some advisors have an incentive to do this. Each time you buy a new fund, this type of advisor may collect a commission, so you start out behind.
If your advisor sells an investment sooner than 12 months after you bought it, you also pay higher taxes on any gain it scored. Sure there might be a very valid reason for doing so, but pay attention to all trading activity, especially those within a short time frame.
General Partnerships. Be extremely wary of any advisor putting your money into an investment where the advisor is the general partner, such as a private real estate venture. This is a huge conflict of interest. In such a case, you are a limited partner, and if the investment sours, the general partners typically emerge far better off than the limited partners.
No Third-Party Custodian. Ask your advisor which custodian holds your assets, and then find their contact information. Do this on your own, even if your advisor volunteers to give you the information. You need to identify independently where your assets are housed.
Now while his may seem like paranoia, remember that Bernie Madoff was the custodian for the client assets he managed, and he ended up bilking his clients out of billions of dollars. You can't be too careful with your money.
Insurance Products. Some advisors package insurance products as investments, collecting commissions on the side. Insurance is primarily protection, and other vehicles tend to be better at building wealth. For example, an advisor may suggest to a young client that he shift his rollover individual retirement account from a Standard and Poor's 500 index fund into a variable annuity. Both are tax- deferred, yet the annuity gives the advisor a large commission. The client likely would have done better with the index fund.
Bad Record. When regulators discipline an advisor for bilking clients, that is a real eyebrow-raiser. How do you investigate advisors' records? The regulators' websites disclose them at www.adviserinfo.sec.gov and www.finra.org. Do your research.
Performance. One bad quarter isn't enough to judge an advisor's ability. However, if your portfolio substantively underperforms compared to the market over an extended period, then it's probably time to find a new advisor. Whether subterfuge or ignorance is to blame, a sinking ship is a sinking ship.
While even sophisticated investors can be fooled by sub-par advisors, knowing the red flags for a bad advisor can help keep your money secure and your mind at ease.