A bad advisor can make your long-term financial planning—an already stressful undertaking—that much harder. They may lack transparency, act cagey around questions of compensation and, not surprisingly, give bad advice.
Here are some examples of things to look out for:
Buy this product (that I can’t—or won’t—explain)
Financial jargon is a great way for an advisor to hide suspect strategies or avoid admitting when they don’t fully understand the course of action they’ve recommended. Yes, some industry-specific terminology will be necessary in order to conduct business, but your advisor should offer, up front, plain English translations of opaque concepts and their justification for using them.
Buy this product (that pads my bottom line)
This is wrapped up in the larger question of how your advisor is compensated. There are many different fee structures out there, but general wisdom suggests going with a fee-only advisor, because they don’t get kickbacks from the sale of any one financial product.
Those that aren’t fee-only may suspiciously push types of insurance products, mutual funds or annuities that may not serve you best in the long run (but will serve them well right now). Ask a lot of questions about their compensation. If they dodge them, it’s time to get up and leave.
Avoid using credit cards
Popular gurus such as Dave Ramsey would have you believe that credit cards are inherently problematic and should be avoided at all costs. But there are potential benefits that you should consider before taking a pair of scissors to your Visa and/or Mastercard.
These cards can be valuable instruments for building good credit, something that proves quite useful when making a major purchase such as a house or car. Many cards offer rewards and discounts on air travel, hotels, gas and at certain retailers. If you only use the cards for set expenses and pay them off every month, the perks will almost certainly outweigh the risks.
Buy an expensive house and enjoy a great tax write-off
Another financial myth that frequently circulates is that you can write off the mortgage interest on your pricey house. What this mainly does is decrease your taxable income, not necessarily reduce your actual tax bill. You still pay more every month toward your mortgage, which may cut into the pool of money available for savings or bills.
Don’t bother with a third-party custodian
One of the most efficient ways to ensure your advisor’s integrity is to hold your account with a third-party custodian. Firms like Charles Schwab and Fidelity or other brokerage firms and banks allow direct access to your account and provide regular statements to keep you apprised of your portfolio’s viability, independent of the opinions or actions of any one advisor.
Some of the greatest swindles in U.S. financial history have come about because of a lack of a third-party custodian.
It’s time for a new beginning
Any healthy relationship between a wealth advisor and client is founded on clear, consistent communication. It’s your money and you make the ultimate choice in any financial decision.
TDECU is a financial cooperative with wealth advisors who have assisted thousands of investors in reaching for their dreams, with no double-talk or questionable motives. Our wealth advisor checklist can be a great way to evaluate which path is best for you.