Stay Updated! COVID-19 pandemic business resources hub »

Protect Your Investments: Spotting a Bad Financial Advisor

You want your money, the earnings from your business, to work for you, but the question is, how do you know you have found a good financial planner who can make that happen? The key—at least most of the time—is to make an informed choice from the start. True, there are people out there who will fool you, Bernard Madoff comes to mind, but if you make an educated choice from the start, and stay on top of your account, your position will be far better than otherwise. 

According to financial expert Steve Merkel, you need to do your homework and look closely at a prospective advisor’s education, their credentials and their regulatory history. “Don't be afraid to quiz your prospective financial advisor on his or her education and experience,” he writes. “How many years of experience in the industry does he or she have? Is a college degree important to you?” 

Merkel recommends, for those who want more than simple stock broker, that they hire a registered investment advisor (RIA) since they are held to a higher fiduciary standard than most advisors, and are typically the most knowledgeable. What really sets them apart, though, is that RIAs are required to provide you, upon request, with Form ADV before you make your final decision. This document is divided into two parts: Specific information about the RIA important to regulators such as name, number of employees, form of the organization, nature of the business, etc.; and a disclosure document for clients of the business with information on services provided, fees, whether the RIA acts as a broker-dealer and transacts securities, and things such as whether he has ever applied for personal bankruptcy. 

If the Form ADV is not offered to you, that is a red flag and something you need to consider when making your final decision. 

In addition to the individual advisor, you should also consider the firm itself. Start out with a Google search of the firm and the advisor’s name even before you meet, and see what comes up. Once you are there, however, you want to know what kind of services you can expect. Here are five questions that you should ask:

·        Will it track my investment cost basis for me?

·        Can it file my tax return and help me with other tax related questions?

·        Does it look at risk management?

·        Can it help you plan my estate?

·        Will it refer me to another professional if the firm cannot provide the service itself? 

All of this advice is geared toward getting you on with someone who will look out for your best interests. However, the advisor you pick is ultimately not responsible for your financial well-being. You are. That means, no matter how good, kind and knowledgeable your advisor is, you should maintain a healthy skepticism. Follow your accounts closely, study your account online and go over the paper statements, watch out for news items that mention your advisor or his firm, and maintain regular contact with your advisor and if things seem wrong to you, ask questions. 

Remember, the more informed you are, the safer you and your money will be.

Night Mode