Financial Advisor Warning Signs

Financial Advisor Warning Signs

It is all too common for investors to place their retirement nest egg in harm’s way by investing in high-risk stocks, bonds, and mutual funds. Most investors are led to believe that the most efficient way to grow and maintain their nest egg in retirement is in these high-risk vehicles and are oftentimes misguided by the financial advisors that manage their retirement accounts. Investors are charged fees, commissions, and other administrative costs that erode their portfolios and result in even more damage when market volatility and downturns cause stocks to tumble. Ultimately, when investors plan for retirement or are living out their golden years they need safer investments than the high-risk stocks, bonds, and mutual funds offered by Wall Street brokers. 

There are several warning signs that will signal to investors that a change should be made, but it can be difficult for retirement phase investors to identify whether their financial advisor is working for the best interests of their clients. New and existing investors are often misled to believe that they can only achieve high returns by investing in high-risk securities and that a financial advisor, such as a broker-dealer or registered investment advisor, is needed to achieve the highest possible returns. Despite these claims, securities advisors tend to overlook one of the most important roles of their job—to protect the client’s investments. Therefore, investors, especially those in or nearing retirement, should establish what their financial goals are prior to selecting a financial professional to ensure that their needs are not only met, but prioritized. 

When investors determine what their goals are, they should ask their financial professional if they are bound to fiduciary standards when recommending and advising clients about investment products. If the advisor does not have a fiduciary duty to their clients, or operates on a partial fiduciary basis, investors should seek out a new financial professional, such as a retirement phase expert. A fiduciary duty requires that the financial professional is always giving advice and making recommendations based on the best interests of each of their clients while avoiding conflicts of interest. 

Advisors who do not have a fiduciary relationship with their clients will make recommendations that expose investor’s nest eggs to an unnecessary amount of risk. Investors can determine whether their advisor has a fiduciary duty by questioning how they are compensated for their recommendations and whether they are focused on retirement planning investment products. Advisors can also be vetted through the Financial Industry Regulatory Authority (FINRA) to uncover any past or present regulatory issues. Using the same regulatory site, investors can review how their advisor is compensated by accessing Form ADV. Moreover, this information can be used to determine if the advisor has any conflicts of interest based on who they receive compensation from along with their fee schedule. 

Another red flag for investors is if their advisor charges exorbitant fees. Investors not only face the risk of market volatility from their security investments, but the add-on of fees limits investment gains while exacerbating losses. Unfortunately, many investors have no idea that they are even paying fees, as these fees are sometimes hidden in the investment’s prospectus. These fees are charged to investors regardless of whether they may make any money during the investment year. Investors who are not aware of fees being charged to their investment accounts should take a deeper look into their investment statements and request an invoice from their advisor to calculate their losses. 

More obvious warning signs would arise from the language and tone of the advisor while working with clients. Advisors who believe that they are the only professional that can provide advice on, or access to a certain investment product would be one example. In a case like this, the advisor is likely bound to a commission that is dependent on reaching a sales quota, which means that the best interests of the client are likely not being represented by the advisor. The same could also be said about advisors that do not offer tailored investment solutions to their clients and rather opt for broad investment opportunities that may not fully meet the needs of their clients. One way to ascertain how the advisor invests for their clients is to ask for sample portfolios to see what kinds of products other investors are in to get a better understanding of the advisor’s motivations. 

Investors must be careful where and with whom they invest their money, especially when they are reaching the retirement phase of their life. Countless stories have circulated the internet that describe the horrors of investors who lost some or all their nest eggs in retirement because of advisors who scammed them out of their money or simply recommended products that were unsuitable and risky for investors in or near retirement. Additionally, investors face multiple obstacles in retirement while working with advisors who promote high-risk securities like stocks, bonds, and mutual funds. Aside from market volatility threatening to deplete investor’s nest eggs, hidden charges and fees erode investments over time before they are further diminished by taxes. 

It is possible for investors to identify warning signs and stray away from advisors and financial experts that do not have their best interest in mind. Investors should ask questions and get as much information as they can from their advisors before investing to ensure that they are comfortable with their investment. When investors enter the retirement phase of their life, it is imperative that they receive an education about their investments and make sound investment decisions to ensure retirement peace of mind. To best achieve this, investors can seek out a retirement phase experts who are bound by a fiduciary responsibility to ensure complete protection of the investor’s nest egg. With the economic uncertainty of inflation, higher taxes, and a volatile stock market, investors who have not protected their retirement funds are in a dire need for a change to protect their nest eggs before the next cataclysmic downturn.