How to Spot a Bad Financial Advisor

Choosing the right financial advisor is one of the most important decisions. A high-quality professional can guide you to make sound decisions, build and protect your wealth, and reach the goals you hope to achieve. But how can you be sure you’re not hiring the wrong one?

To shield your best interest, it’s important to know how to spot a bad financial advisor before hiring them, when they may cause you to make lasting decisions. In this article, we’ll walk you through five different red flags to watch out for and provide tips on how you can proactively protect yourself as a client.

1. Lack of Transparency

The relationship between a financial advisor and a client requires a significant amount of trust. Advisors often have the authority to manage portfolios and make investments on behalf of their clients, directly influencing their finances. That’s why transparency isn’t just important—it’s essential.

Advisors should be open and honest about their business practices, fee structure, and investment strategies. When entrusting your money to a professional, it’s critical to understand what they’re doing with your assets and why.

Chad Gammon, CFP^®, owner of Custom Fit Financial, says advisors should be clear about “what services will be provided and what price it will be.” He also emphasizes that this clarity should extend to a firm’s website, noting that it shouldn’t feel like “a treasure hunt” to find essential information.

“Advisors should also disclose any conflicts of interest,” Gammon adds. “This would disclose any relationships that may influence their recommendations.”

If you come across an advisor who doesn’t reveal conflicts of interest and avoids providing the information above, you should steer clear. Your initial consultation and their website, as Gammon points out, can help you determine whether a professional is being upfront.

2. No Credentials or Fiduciary Duty

In the financial advice industry, having the right credentials for the job is key. Certifications, such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA), communicate to a professional’s peers and clients that they are qualified, adhere to ethical standards, and have the requisite experience to help clients manage their finances. As a client, this can make you feel more comfortable that you’re hiring the correct person.

Equally important is ensuring your advisor is a fiduciary. This legal obligation requires a professional to act in your best interest at all times, whether it’s the advice they give or investments they make. Experts with credentials, such as CFP or CFA, must follow this standard.

In your first meeting with an expert, pay close attention to their designations and ethical standards. If you’re unsure, never be afraid to ask them, “Are you a fiduciary?” If they act dodgy or are unclear, that may be a sign to walk away and find someone else.

In the case of financial advisor firms, be aware that those operating as a registered investment advisor (RIA) with the U.S. Securities and Exchange Commission (SEC) must act in a fiduciary capacity at all times. However, this only applies to its advisory business, rather than other aspects, such as being a broker-dealer.

For both firms and individual advisors, you can use either FINRA’s BrokerCheck or the SEC’s Investment Adviser Public Disclosure (IAPD) tool to verify credentials and conflicts of interest. The IAPD gives you access to large RIA firms’ Form ADV, which contains a wealth of information, including disclosure history, assets under management (AUM) details, and compensation of professionals.

3. They Pressure You into Products or Services

The services you receive from a financial advisor should be what you need—no more, no less. When a professional helps you, it’s important that they only offer products, services, or investments that are in your best interest. Pressuring you into specific strategies, for instance, is a bright red flag that they may not be ethical.

“Regardless of how an advisor is compensated, high-pressure tactics or communication misaligned with past statements might demonstrate shifting allegiances,” notes Stephen Kates, CFP^®, Principal Financial Analyst at RetireGuide.com. As a client, be attentive to your advisor’s words and actions. This should give you an idea of whether they’re truly keeping your best interest as a top priority.

4. Poor Communication and Attitude

An effective and productive advisor-client relationship greatly depends on communication. As you work with a professional, it’s important that you both get along well and that they are constantly informing you on what they’re doing. If this isn’t the case, you’ll likely feel out of the loop on what’s going on with your money.

For example, consider a situation where you hire a financial advisor to manage your portfolio. This typically involves regular trading, monitoring, and rebalancing if necessary. If an advisor decides to shift your strategy, they should let you know.

“A good financial advisor will ask many questions to understand your financial situation (a bad one will not),” explains Paul Miller, CPA, Managing Partner at Miller & Company, LLP. Additionally, he says they should “have a clear system for effective follow-up to ensure everything gets done correctly (a bad one won’t have any organization or road map).” If an advisor isn’t communicating with you to personalize service or following up, it may be time to look elsewhere.

5. Their Strategies Aren’t Performing Well

Above all, you hire a financial advisor because you want to see results. Whether that means long-term growth or getting a handle on your money, it’s important that you get the value you need from a professional. And, while no advisor can guarantee success (it’s a huge red flag if they do), their strategies should align with your goals and demonstrate thoughtful, evidence-based reasoning.

Unfortunately, measuring a financial advisor’s performance isn’t easy when you haven’t worked with them. However, once you do begin your relationship with a professional, be extra cautious and attentive to their strategies, reasoning, and how they implement it. If you don’t agree with something or feel that you aren’t getting value for your money, it may be time to reconsider.

During your search for an advisor or firm, however, it’s a smart idea to read online reviews, both by editorial and consumer response websites, such as Trustpilot or Google. This can give you an idea of what to expect and the experiences others have had.

How to Protect Yourself as a Client

Finding a financial advisor can be a daunting process, especially with so many options to choose from. As you look for and meet with professionals, taking steps to protect your interests as a client is essential. In particular, it’s crucial to thoroughly research who you’re working with and ask the right questions when you meet them.

If you’re considering an advisor or particular firm, it’s always a good idea to vet them on your own (even if a family member or friend recommended them). A good place to start, as mentioned earlier, is by looking up a professional or firm on FINRA’s BrokerCheck or the SEC’s IAPD. You should also read internet reviews to gain a further understanding of what to expect.

Next, it’s time to meet an advisor, either in-person or remotely, to decide if they’re for you. This is an opportune time to look for red flags and determine whether you can build a rapport with them. During your initial consultation, consider these questions to learn more about a professional:

1. Are you a fiduciary?
2. How do you make money?
3. How much will I pay?
4. What qualifications do you have?
5. How often will we meet?
6. What is your investment philosophy or what strategies do you often recommend?

As you search for a financial advisor, we recommend using this free matching tool to help find a high-quality fiduciary. After filling out a brief quiz regarding your goals and current situation, it’ll connect you with a pre-vetted professional that aligns with your needs.