1. They Tell You Mutual Funds Beat The Market

For many years the financial world raged with a great debate. Which is better, mutual funds or ETF’s. In many ways, mutual funds and ETF are very similar. They both offer a diversified pool of stocks and or bonds. They both send you reports and prospectuses about your investment. And they both are easy to track the value of, as they trade on public exchanges. There are however some key differences. Mutual funds are actively managed by teams of investment professionals, with the goal of beating the market. In order to pay those people, mutual funds generally charge much higher expenses than ETF’s.

2. They Tell You Not To Use ETF’s

Despite the data, many financial advisors still push clients toward mutual funds. Why? There are two possibilities, and I sincerely hope that the first option is the more prevalent reason. First, they themselves could still believe that mutual funds are better. There is still the occasional data point that suggests mutual funds are worth it, and they as advisors are constantly barraged with marketing from mutual funds companies trying to convince them of this. The second option comes down to money. A portion of the expense ratio a mutual fund charges every year gets sent right back to the advisor in the form of a kickback. It does make it harder to give fair and balanced advice when one of the options will pay you more…

3. They Recommend High Cost Mutual Funds

This is where what we just discussed goes from bad to worse. Mutual fund fees are all over the place. The annual expense ratios can be anywhere from .5% to 2% per year. And, if the same holds true, that a portion of that fee gets kicked back to the advisor, all of the sudden, they not only might want you to buy mutual funds, but they may want you to buy the expensive ones. If that doesn’t sounds like a big deal to you, consider the following chart that shows what that difference in fees can do over time to your return.

4. They Try To Sell You Whole Life Insurance

Whole life insurance is the worst (legal) financial product ever conceived. This stuff gets sold far and wide by insurance agents around the world. I could write paragraph after paragraph about how terrible this stuff is, but I think I will just keep it simple. The person trying to sell you that insurance will make more money in the first month than you will for the rest of your life. The salesperson wins, the insurance company wins, and you lose. Well, I guess to be fair, if you were to die right after buying it you would win.

5. They Try To Sell You ANY Permanent Life Insurance

Whole life insurance is not the only flavor of a bad product. If any advisor is trying to convince you to buy anything called variable life, indexed life, universal life, or any combination of those words they are not an advisor. They are a salesperson. The Only insurance you need is term life insurance. And depending on your financial situation, you may not even need that.

6. They Try To Sell You Annuities

Ah, the ugly stepchild of permanent life insurance, the annuity. The insurance companies decided they were not making enough money on life insurance, so they wanted to enter the investment business. Ken Fisher, founder of Fisher Investments, really sums this up best. “Anything you want to do with an annuity, there is a better way to do it.” Annuities often sell like wildfire during down markets because they offer certain protections against loss in value. The problem is they charge a very hefty fee in order to do that, usually in the ballpark of 2-4% per year. They come with extremely confusing contracts. And they lock your money up for 7-12 years in a surrender schedule.

It's that surrender schedule that really gets you. See, people lap these things up and happily pay 3% per year in order for their account to “never go down” in value. That sounds great if that’s the only part you here. But if that contract ties you up for ten years, how much protection are you really even getting? Turns out, not much. Your odds of losing money if you invest in the S&P 500 for 10 years. 6%. And, if you are that unlucky how much do you stand to lose? 4.1%. 1. So, annuities charge you 30% over the next ten years, to save you from the 6% chance of losing 4.1%.

7. They Try To Sell You Anything At All

While we are on the topic a real advisor shouldn’t be trying to sell you anything at all. If you are meeting with an advisor for the first time, the conversation should be a lot more like a job interview where you are considering hiring them, rather than a sales pitch where they are trying to sell you something. A good advisor will be a fee only fiduciary. I know that is a long term, but what it means is that the advisor will only do what is in your best interest, and the only way they get paid, is by the fees you pay them. No kickbacks, no commissions, and no conflicts of interest. If an advisor has the ability to earn kickbacks and commissions it opens all kinds of doors for account churning (where they buy and sell frequently solely to generate commission), high costs funds, insurance products, and all sorts of other things that do not belong in your investment portfolio.

8. They Avoid Telling You What You Are Paying

A lot of advisors are afraid to tell their clients what they actually charge. The whole industry is this way really. Over the years nobody has gotten as good as the financial industry at hiding fees and making confusing compensation structures. Here is a rule of thumb, if they aren’t forthcoming with what they are charging you, then you are probably paying way more than you think. I display my costs right on the menu bar of my website. You can see it right above this post. I would suggest you only work with an advisor who does something similar.

9. They Don’t Explain The Why

The “what”, is the investment they are recommending. The “why”, is all about why that is the right investment for you. Bad advisors love to glance over this, but a good advisor takes the time to explain to you what you are investing in, why it is the right investment for you and your plan, and how much it costs.

10. They Talk In Confusing Terms

Just like they have gotten good at hiding fees, the financial industry has become very adroit at using large confusing words in such a way as to make you, the client, stop asking questions. My advice, NEVER stop asking questions. Many financial advisors need a good slap in the face as a reminder of who’s money they are talking about, and who works for who. Make sure they talk to you in a way you understand, and as questions until you do understand. This is how you prevent yourself from being taken advantage of.

11. They Constantly Ask You To Send Your Friends To Them

When I was in training at my first job out of college I was taught this phrase and told to say it often when meeting with clients.

“There are two ways I get paid. One is by the commissions and fees I earn from us working together, and the other is by you introducing me to your friends and family.”

I wanted to take a shower after I heard that. Let me be clear, clients do not pay me in two ways. They pay me for my service, and that is it. Not in commissions, not in referrals, but for the work I do. If your advisor is constantly asking you for referrals, they are likely working at a firm that is pushing them to be much more of a salesman, than they are a financial advisor. If your advisor does a great job, and you want to send someone to them, great. But if they are asking you to do it, you need to reevaluate.

12. They Don’t Use A Third Party Custodian

Bernie Madoff did NOT use a third-party custodian. The vast majority of financial firms do use them, but if an advisor doesn’t it is hands down the biggest red flag. A third-party custodian, is a firm, outside of the advisors firm, that actually holds your money and assets. To give an example, my firm Balanced Capital, uses Altruist as our custodian. That means my clients funds are held and watched over by Altruist. Altruist send their statements, and Altruist is linked to their bank accounts. I have no ability to defraud my clients, or steal their money, because I never had their money.

13. They Recommend Illiquid Investments

Liquid investments are investments that are easy to sell, and you can get your money back quickly. Any investment that is publicly traded on an exchange falls into this category. The things that don’t are investments like limited partnerships, real estate groups, private placement investments, oil rights and so on. I am not saying that these are bad investments, but they are often times very Illiquid investments, and it can take time to get your money back. As long as you understand that going in, it’s not necessarily a bad thing. But your advisor needs to be very upfront about that. I find all too often that new clients come to me with these investments and have no idea that they can’t have their money for another year.

14. The Answer Is Always To Invest More Money With Them

Sometimes the best thing to do with your old 401k is to leave it right where it is. Sometimes the best investment available right now is an I bond, bought straight from the treasury website. If your advisor’s solution is always to transfer more money into their firm, they aren’t looking out for you, they are looking out for themselves.

15. They Charge Annual Account Maintenance Fees

My prior firm charged a $40 annual account maintenance fee. That was in addition to any investment expenses. Why, I have no idea. If your advisor, or the firm they work with charges a fee like this, it’s time to move. There is just no reason for these fees to be a thing anymore.

16. They Don’t Review Your Taxes With You

That same firm also had a sign on the door that said I couldn’t provide tax advice. Yet, they had no problem with me recommending a Roth IRA to a client. What is that recommendation, if it isn’t tax advice? The reality is that almost everything your financial advisor tells you to do will generate some sort of tax consequence. You owe it to yourself to work with an advisor who doesn’t ignore this, but actually incorporates it into your investing strategy. You need an advisor who will actively work with you to lower your tax bill.

17. They Tell You They Can Predict The Market

We can’t. Advisors, nor anybody else knows what is going to happen next month, or next year. What we do know, is that by putting in place a long term plan, and coordinating it with your tax strategy, we can help be financially successful. If an advisor tells you they know what is coming, or that they have a proprietary system to beat the market, I’d place a good bet that they are running a ponzi scheme.

1. https://money.com/stock-market-chart-rolling-returns/

17 Ways Financial Advisors Try To Screw You Over