Anyone can be a financial advisor since there are no specific qualifications nor does a person need to be registered. How do you know they are not amateurs or scammers, when you are looking for guidance and support on your investments?
A study by securities officials of “free meal” financial investment seminars, found that half of them exaggerated or made misleading claims about their services. Around 10% were frauds that were selling non-existent products or promising unrealistic returns.
Anyone can call themselves a financial advisor or planner, without either experience or qualification. These terms are considered to be generic and their use is not regulated by federal or state governments, or by financial regulatory bodies. In some cases, an advisor may claim professional qualifications but they could fabricate the qualifications or the qualifications could be based, on a home study course. Some of these people may be honest business people, who simply lack the training and expertise to help your financial strategy. However, there are cases where people could be operating financial advisor scams that transfer your money directly to them.
Most financial advisors operate with your best interest in mind but there are some who will scam you. Although, it is difficult to tell which advisors are good and which are bad.
10 Red Flags to watch for before choosing your Financial Advisor
- Suggesting liquidating all or a major part of your portfolio and putting the proceeds into a single product (most often an annuity, on which they receive a generous commission).
- Pushing a single type of investment and are uninterested in exploring your needs and personal risk preferences.
- Telling you the investment is only available through them, which makes it difficult to cash out.
- Offering a contract that includes taking a share of financial gains.
- Focused on one area of finance and are not knowledgeable in different types of investments.
- Refusal to detail their fees or does not elaborate on how they earn their money (bonuses or commissions for selling certain products.
- Asking for an advance on fees for their services or having a check made out to them personally as opposed to the organization or institution in which you are investing.
- Inviting you to make a loan to them or signing a loan guarantee.
- Promising unrealistic returns on “a perfectly safe investment.”
- Urging you to act quickly, without ample time to do research on the product being offered
10 Questions to ask a Financial Advisor
- What are your qualifications? Most important 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 check it out online.
- How do you earn your money? Fee-only is best. Beware of “fee-based,” as this may mean they also get a commission. If it is “by salary,” ask if they also earn a bonus for selling particular investments. A financial advisor may earn a commission, as long as they tell you.
- Can you provide references from long term clients that can be contacted, and are there examples of financial plans that have been drawn up for other clients (without their personal information)?
- How many clients does your organization have and how many personally do you have? The greater amount of clients, the less time s/he can devote to your financial needs.
- How long have you been a financial advisor and is there proof? Sometimes scammers use older people to make it seem that they have been doing the job for a long time.
- Are you registered with FINRA (the Financial Industry Regulatory Authority), the SEC or a state licensing body? If someone is registered with the SEC, they will have ADV form, which is a requirement of registration.
- Are you a member of the National Association of Personal Financial Advisors or any professional trade organizations? What is in their Code of Ethics? It is best to double check the information online.
- How vast is your general knowledge of the different products and services in the financial sector? Are there advantages of one over another?
- Have you ever had a formal complaint filed against you, been sued by a client or disciplined by a regulatory body?
- May I have time to think things over and to talk to a few other financial advisors? If they seem hesitant, object or seem uncomfortable, take your business elsewhere.
A few of these questions are direct, but do not forget, it is your money and your future. Lastly, no matter how much you trust your financial advisor, always keep a close eye on your investments and act quickly if you suspect something is amiss. If you feel you have been a victim of a fraudulent or unethical financial advisor, tell us your story below and we will do our best to help you!