Spot an Unethical Financial Advisor

The Red Flags We Look For

While the vast majority of the financial advisory industry prioritizes their clients' best interests, we're all aware that certain individuals don't operate with the same level of integrity.

In 2022 alone, FINRA - the regulator responsible for overseeing 3,400 U.S. brokerage firms - referred ~660 seperate cases for prosecution and barred or suspended 555 individuals from providing financial advice.

The bottom line is fraud happens. And at Financial Advisor Review, we expect it to continue to happen. This is why being aware of the red flags is necessary, not optional.

Here are factors to consider when spotting a nefarious financial advisor:

1. Lack of Transparency:

Trustworthy advisors are upfront about their fees, investment strategies, and any potential conflicts of interest. If you find an advisor being evasive about their charges, commissions, or how they're compensated, it's a major warning sign.

2. Not a Registered Advisor:

Always verify that the financial advisor is registered with the appropriate regulatory bodies, such as the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). These registrations not only validate their legitimacy but also ensure they follow industry standards.

3. Pressure Tactics for Investments:

An advisor should never push you into making quick decisions. If they're pressuring you to invest in something without giving you ample time to understand or research it, be wary. You should never feel rushed or pressured in any financial decision.

4. Promises of Unrealistic Returns:

The old adage "if it sounds too good to be true, it probably is" holds weight here. Be cautious of advisors who promise guaranteed or very high returns. No investment is without risk, and any promise otherwise is a red flag.

5. Not Tailoring Advice:

Every individual's financial situation and goals are unique. If an advisor offers a one-size-fits-all solution without considering your personal needs, they might not have your best interests at heart.

6. Frequent Turnover in Your Portfolio:

Churning, or excessively buying and selling assets in your portfolio, can generate high commission fees for the advisor but might not be in your best interest. While not necessarily illegal, this practice is certainly unethical. If you notice a high frequency of transactions without clear rationale, question the motives.

7. Avoiding Detailed Questions:

A genuine advisor should have no issues answering detailed questions about investment strategies, risks, or any other concerns you might have. If they dodge questions, provide vague answers, or divert the topic, it's a sign of potential deception.

8. Not Providing Regular Updates:

An advisor should periodically review your portfolio and financial plan, providing updates and adjustments as needed. If your advisor isn’t keeping you informed or is hard to reach, reconsider the partnership.

9. Negative Online Reviews and Complaints:

While one or two negative reviews can be outliers, a pattern of complaints or severe allegations online can be concerning. This is why FinancialAdvisorReview monitors FINRA's BrokerCheck and the SEC's Investment Adviser Public Disclosure database for any red flags.

10. Unexplained Charges:

Always check your statements for fees and charges. If there are unexplained or unexpected fees, it's essential to get clarity. An advisor who isn't clear about the fees or hides them is not one you want to trust.

In Conclusion:

Your financial well-being and future are of paramount importance. While the vast majority of financial advisors are ethical professionals who genuinely want to help, it's essential to be vigilant and aware of the potential red flags. Don't be afraid to ask questions, do your research, and always trust your instincts. If something feels off, it might be worth looking elsewhere for financial advice. Your future self will thank you.