Yesterday I sent out the following tweet after seeing a link from Investment News about how “a million dollar producer has jumped ship”:
Obviously, it’s not this guy’s fault that ‘producer’ is really just some industry jargon for how much revenue an advisor or broker is bringing in for the firm. But if your advisor thinks only in terms of how much money they can bring in, you’re probably not getting the very good advice. Yes, it’s a business and everyone has to make a living, but it’s never going to be a great situation for you as a client if your advisor is constantly looking for opportunities to cross-sell you as many products as they can to maximize their earnings. In fact, financial professionals should always be up front with their clients about how they’re compensated or the potential conflicts of interest involved in the business.
Here are a few other ways to tell if you’re getting the wrong type of financial advice.
“Trust me. I got this.” If there’s no explanation or reason given for how your portfolio is being invested, that’s not a good sign. Every piece of advice requires at least a minor leap of faith, but turning a blind eye and hoping for the best isn’t a sustainable strategy.
“We ran a series of Monte Carlo simulations and you can see that the t-statistic for the Sharpe Ratio on this portfolio…” So many people in the finance industry try to talk over your head and can’t explain what it is they’re trying to do for you. Even if you find the world’s greatest investor, if they’re unable to effectively communicate with you, it’s unlikely that relationship is going to work.
“Here’s how we think you should play this.” An investment plan should not consider how to play something, but how to plan for a wide range of eventualities. Trying to “play” interest rates, economic data or stock market corrections rarely works out very well. You never want someone playing with your life savings.
“We got a solid tip on this stock.” Acting on tips is not a plan, it’s a way to lose money.
“If you’re not investing in (insert hot investment fad) you’re missing out.” No one should ever recommend an investment opportunity without first considering your personal circumstances. Carl Richards says you should never receive a prescription without first being diagnosed.
“We made 36 changes to your portfolio in the past six months to take advantage of market opportunities.” Making constant changes to your portfolio or strategy is a huge red flag.
“You want insurance with that? How about an insurance-related product? Did I mention I sell insurance?” Insurance can play a role in the financial planning process, but it should never be the entire focus of your financial plan. If someone is constantly pushing insurance products on you and telling you how wonderful they are, they’re probably trying to earn a fat commission.
“Me, me, me, me.” You’re not getting good financial advice if they never ask you any questions and only focus on themselves or their firm.
“It’s a proprietary model.” You never want to invest with someone who can’t or won’t explain how their strategy works. Black box strategies may sound intriguing but they’re more trouble than they’re worth if you don’t understand the risks involved.
“We can guarantee stock-like returns with bond-like volatility, ensure you never have to touch your principal balance and avoid all losses on risky assets.” Promises and guarantees make you feel safe when you get the pitch from someone, but the best anyone can do is offer to give you a high probability for success. Nothing is ever a sure thing in the financial markets. Try to avoid people who consistently use the terms always or never.
“We hedge out every risk you can think of.” Risk comes in many different forms and there’s no way to completely avoid taking risk. Every investment stance involves some form of risk whether you understand those risks or not.
“I know that’s what we told you we were going to do, but this time we’re serious.” Making mistakes in the markets will happen on occasion. No one is perfect. But the best way to judge a financial professional will be how well they do what they said they were going to do at the outset.