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Intentional vagueness about fees, as well as a lack of interest in your investment goals, should serve as warning signs.
Dentist’s Money Digest has covered extensively the benefits of working with a financial advisor. There are many, particularly for busy dentists. But there are some horror stories of working with advisors as well. Here are some warning signs to watch for.
1. Not learning or adhering to your investment goals, or your core values. No advisor worth her salt will suggest any transactions or investments prior to knowing your full financial picture, including your history and your goals. This information-gathering is the foundation of a long-term partnership. An advisor in it only for the commissions or fees won’t spend a lot of time on it; someone interested in a long-term, mutually beneficial relationship will.
2. Intentional vagueness, especially around fees. Specificity and detail are the enemy of any nefarious advisor. The bad eggs out there thrive when their customers don’t ask detailed questions about how the returns are earned or how fees are structured. Ask. If you don’t understand the answer, ask again. Make sure you understand fully, and up front, what you’ll pay for, when, and how much. You don’t always have to understand something fully to be able to ask probing questions about it. That act of questioning alone may be enough to indicate to your advisor that you won’t simply go blindly along with whatever structure he is suggesting.
3. Ignoring your calls, your spouse, or your portfolio. An advisor who doesn’t return your calls may not be hiding anything nefarious, but she also isn’t hiding her indifference to your business. An advisor who talks to you with impatience or condescension is telling you that giving you full explanations isn’t worth his time. An advisor who ignores your spouse or partner is telling you to find another advisor.
4. Putting their interests before yours. While the Department of Labor issued new regulations this past April that will ultimately help with consumer protection, many of those provisions aren’t effective until April 2017. Until then, many advisors are only held to a standard of “suitability.” Know to which standard your advisor is required to adhere. If it’s a suitability standard, look for some common signs that investments your advisor is suggesting may be benefiting him or her more than you.
5. Churning, or excessive trading, is a way for an advisor to earn commissions through a high volume of trades. While a high degree of activity may look like churning, it may simply be an advisor strategy that does indeed benefit you. How can you tell? Talk to your advisor. Ask him about the necessity of the number of transactions. Ask him to show his rationale for making the transactions. Ask for the results. Most importantly, make sure the rationale you’re given matches up to your expressed investment goals.
6. Pushing products or services excessively. If your advisor keeps bringing up the same opportunity, over your objections or your goals, it may be that she believes so strongly in it that she doesn’t want you to pass it up. It could also mean that she may stand to benefit by drawing investors to that vehicle. Good advisors are good listeners.
7. Always agreeing with your financial choices. This sounds counterintuitive, right? You are the primary decision-maker, after all. But an advisor who simply follows directions is an administrator. A good advisor will likely disagree with you on some investment choices you make, and he or she should raise those objections with you and be able to articulate the reasons behind those objections. You may ultimately plow ahead anyway, as is your right, but an advisor who simply nods at all your strategies isn’t providing very much value.