A client determining whether her financial advisor is a good fit.
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A financial advisor should help you make informed decisions, but there are warning signs of a bad financial advisor that could indicate when they are doing otherwise. These signs generally include pushing unsuitable products, lacking transparency about fees, or being unresponsive to your questions or concerns. If you’re unsure about sticking with an advisor, here are six red flags that could help you avoid costly mistakes and potentially move on from the wrong advisor to find a better fit.
A financial advisor who is difficult to reach or doesn’t communicate effectively may not be the right fit for those looking to stay up to date with their financial plan. Timely communication builds trust and keeps you confident in the decisions made on your behalf, while poor communication can lead to misunderstandings, missed opportunities, or feeling disconnected from your financial plan.
If your advisor avoids your calls, provides vague answers or fails to proactively update you on your financial progress, it could indicate a lack of dedication to your needs, time management problems, too many clients per advisor at the firm or another issue.
An advisor with a confusing or well above-average fee structure may not have your best interests at heart. A financial advisor’s fees should be straightforward, and your advisor should clearly explain how they are calculated-whether it’s hourly, as a percentage of assets under management or commission-based.
If costs are vague, layered with hidden charges or seem disproportionately high without clear justification, it could indicate a lack of transparency or fees that aren’t proportionate for the services they’re providing. Further, high or unclear fees can eat into your investment returns over time, leaving you with less value in the long run.
Some financial advisors may also be dually registered as representatives of broker-dealers or licensed to sell insurance products. These dual roles can create a potential conflict of interest if the advisor buys specific products to earn commissions rather than focusing on what fits with your investor profile and best interests.
If you feel pressured into buying a particular financial product-like an insurance policy, annuity or mutual fund-without a clear explanation of how it fits your financial goals, this could be a warning sign. An advisor should prioritize your financial objectives over their own compensation in all cases, so if their recommendations are driven by anything other than strategy, it may be time to evaluate whether their advice truly serves your best interests.
An advisor who provides cookie-cutter services without considering your unique financial situation might not be ideal, particularly if you’re looking for a personalized approach. Everyone’s financial circumstances and goals are different, and most advisors will offer a more customized approach when making their recommendations and decisions.
For example, if you’re nearing retirement, an advisor should create a plan that considers your income needs, healthcare costs and risk tolerance, at the very least. Similarly, a younger client may require strategies focused on debt management and long-term growth.
If your advisor is offering generic solutions or not taking the time to understand your specific needs and goals, it could mean they aren’t committed or able to provide you with personalized advice that serves your specific financial situation and goals.
Account churning occurs when a fee-based advisor excessively trades the assets in your account to generate more commissions for themselves. This illegal practice can lead to unnecessary fees and can negatively impact your short- and long-term investment performance.
If you notice frequent buying and selling without clear, justifiable reasons, it could be a sign of churning. Keep an eye on your account statements and question any activity that doesn’t align with your investment goals.
A responsible advisor should always have a sound strategy behind each trade and be transparent about the reasons for their actions. In turn, churning can signal that your advisor may be prioritizing their own profits over your financial interests.
An independent custodian is a third party that holds and safeguards your assets, adding an extra layer of protection against fraud. If a financial advisor does not use an independent custodian, it could be a red flag. Without this safeguard, there’s an increased risk of unauthorized transactions or even misappropriation of funds.
An advisor who manages and holds custody of assets may have excessive control, which could lead to unethical behavior in extreme cases. Verify that your advisor uses an independent custodian to protect your investments and reduce potential conflicts of interest.
A client reviewing an investment plan that was created by her financial advisor.
Choosing the right financial advisor involves more than just checking credentials-it requires paying attention to how well they meet your specific needs, communicate with you and protect your assets. Being aware of the warning signs of a bad financial advisor can help you determine if your advisor truly has your best interests at heart. Searching for an advisor who prioritizes transparency, tailored advice and ethical practices can help you find someone you feel comfortable working with and who will genuinely serve your needs.
Finding the right financial advisor involves choosing someone who aligns with your goals, values and financial needs. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to know how much your money could grow over time, SmartAsset’s investment calculator could help you get an estimate.
