When to Bail on Your Financial Advisor

Telltale Signs You Are Being Taken Advantage of and What You Should Do About It

Delegate, Not Abdicate

Making sense of financial advice is complex and daunting for most people. Financial advisors help guide us through the maze of investments, savings, and retirement planning.

Not all advisors have their clients' best interests at heart. For starters, detecting wrongdoing can be difficult. Exploitative practices can be sophisticated, especially for individuals who are not financially savvy or who don’t take the time to understand the details. Violations of trust like this can cause significant problems.

The most obvious is financial loss. Advisors acting in bad faith can mismanage funds, invest in high-risk or unsuitable products, or engage in fraudulent activities. Being taken advantage of can severely impact funds intended for long-term goals, like retirement. Consequences may include returning to work out of necessity or leaning on relatives and close friends for financial support.

Such experiences can erode trust in financial institutions and advisors. This distrust can deter individuals from seeking financial advice in the future, which can negatively impact their long-term financial health.

Don’t forget the stress, anxiety, and a sense of betrayal that financial exploitation often causes. These feelings are even more pronounced if the advisor was a trusted friend. Then there is the legal process to recover lost funds or hold the advisor accountable, which can be time-consuming, complex, and costly.

To minimize risk, let’s step back to first understand what a healthy advisor-client relationship looks like.

A Good Financial Advisor Should Always…

• Understand your financial goals: The advisor should take time to understand your short-term and long-term financial objectives.
• Provide transparent advice: An advisor should clearly explain their recommendations and how they align with your goals.
• Disclose all fees and commissions: They must be upfront about how they are compensated.
• Communicate clearly and regularly: Written and verbal communications must be understandable and follow a predictable cadence.
• Act in your best interest: Ideally, your financial advisor should be a fiduciary, which means they are legally required to prioritize your financial well-being.

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What to Look For if You Feel Being Taken Advantage Of

Being taken advantage of is a terrible thing. Look for these telltale signs that something is amiss.

• Frequent trading in your account. Excessive trading can be a red flag. Known as “churning,” this practice generates commissions for advisors but can erode your investment returns due to fees and taxes.
• Lack of clear communication. If your advisor is not regularly communicating with you, explaining their decisions, or is difficult to reach, then the lack of transparency is a cause for concern.
• Unexplained fees or charges. Unexpected fees or charges on your statements that were not clearly explained upfront can indicate unethical practices.
• Investment strategies that don’t fit your risk profile. Your advisor should recommend investments that match your risk tolerance. If your portfolio is too aggressive or too conservative for your liking, this could be a sign of misalignment.
• Pressure to buy certain financial products. Be cautious if your advisor frequently pushes products or investments, especially if they seem to benefit more from the transaction than you do.
• Lack of personalization in advice. Your goals should drive your financial plan.w Off-the-shelf solutions or a one-size-fits-all approach can be a sign of a disengaged advisor.
• No regular reviews or adjustments to your plan. Your financial needs change over time. An advisor who doesn’t regularly review and adjust your plan may not be adequately attentive to your evolving needs.

What to Do if You Discover Wrongdoing

Consider the following six steps if you suspect that you are being taken advantage of. 

1. Get a second opinion

Consult another financial professional for a second opinion. This can help confirm whether your suspicions are warranted.

2. Confront your advisor

If you have concerns, address them directly with your advisor. Ask for explanations about fees, investment choices, and their strategy.

3. Understand your exit options

Know what it would take to change advisors, including any fees or penalties for transferring accounts.

4. Report unethical behavior

If you believe your advisor is engaging in unethical or illegal activities, you can report them to regulatory bodies like the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC).

5. Educate yourself

Increasing your financial literacy can help you better understand your investments and the actions of your advisor.

6. Consider a fiduciary

If your current advisor is not a fiduciary, consider switching to one. Fiduciaries are legally bound to act in your best interests.

Trust but Verify

While most financial advisors are ethical and professional, it’s vital to remain vigilant and proactive in managing your financial affairs. Recognizing the signs that you might be being taken advantage of is the first step in protecting your financial future.

If you find yourself in this situation, take action by reviewing your financial documents, seeking other opinions, addressing your concerns directly with your advisor, and working promptly to make a change.