As a Certified Financial Planner™ practitioner I have seen a disturbing trend over the last year or so of clients seeking my assistance with their concerns regarding various financial products they own that they do not understand. These products are not providing them with the results they were led to believe would be forthcoming.
In the spirit of my belief that an informed consumer is the best defense against these sorts of problems, I present to you the eight deadly sins of financial advice and how to get around them.
1. Show Me the Money: Ask the advisor proposing a financial product what he/she is being paid for the sale and who is paying him/her.
2. Do You Eat Your Own Cooking?: Ask to see proof of the financial advisor’s ownership of the product he/she is proposing for you.
3. Mug Shots: Before you commit to any transactions, ask the representative which agency regulates his/her activity and visit their site. FINRA, the SEC and state insurance boards all have websites where you can find the disciplinary records of advisors.
4. The Pen is Mightier: Demand that all recommendations and proposals be in writing, as well as copies of all the product documentation (sample plan or portfolio, prospectus, insurance illustration, etc.) before purchasing any financial product and review the information carefully prior to buying at a subsequent meeting.
5. Quicksand Pit: Make sure you understand any illiquidity issues with the product you are purchasing. Variable annuities, private equity REITs, and cash value life insurance are examples of products that are oftentimes sold by accentuating the positive aspects of ownership while glossing over the financial penalties associated with liquidation.
6. The F Word: Work with a representative who is bound to a fiduciary standard whenever possible (one that’s required to put your interests ahead of their own). CFPs® and RIAs are held to this standard. Insurance agents, registered representatives and brokers are held to a suitability standard (the product must be suitable given the client’s age, financial situation and risk tolerance, but is not necessarily the product which is in the best interest of the client); their fiduciary standard is to their employer.
7. Alphabet Soup: Plenty of folks hold themselves out to be financial advisors and financial planners while in reality they are salesmen. Some of them do have a multitude of designation letters after their name. If an advisor’s name is listed as Frank Fiduciary, ABC, DEFG, XYZ, ask him/her to supply you with the educational and experience requirements, accrediting agency and a copy of the ethics guidelines from that agency for each of the designations.
8. The Fox Guarding the Chicken Coop: Never let your advisor hold your investments; use an independent custodian.