The most serious warning signs of a bad financial advisor are about where your money is and who controls it: being asked to give the advisor money to invest instead of depositing it with a custodian, statements that come only from the advisor, guaranteed returns, and trades you didn’t approve. Those can mean fraud, and they call for action today. Below them are signs of a conflict that quietly costs you money, and below those, signs of an advisor who is simply not doing the job.
Here are all three tiers, and what to do about each.
Stop and check now: signs your money may not be safe
These are the patterns FINRA lists as red flags of investment fraud, along with what the custody rule for advisers requires.
Money to invest goes to the advisor, not a custodian. A registered investment adviser that controls client money generally has to keep it with a qualified custodian, such as a large brokerage firm or bank, in a separate account for you. FINRA’s red flags include sellers “who request that you provide money to them personally.” Paying a planner’s invoice for their fee is normal. Money you’re investing should go to the custodian.
Your statements come only from the advisor. Under the custody rule, the advisor has to have a reasonable basis for believing the custodian sends you a statement at least every quarter, showing what you hold and every transaction. If you’ve never received one from the custodian, or the advisor’s reports don’t match it, call the custodian directly, using a number you find yourself.
Guaranteed or unusually steady returns. FINRA warns against anyone who “guarantees that an investment will perform a certain way,” and against returns that go up month after month regardless of markets. Real investments have bad years.
Secrecy and pressure. “A legitimate professional won’t ask you to keep secrets,” FINRA says, and none should push you to decide immediately. Being told not to discuss an investment with family or your accountant is a red flag on its own.
Trades you didn’t approve, or money that’s missing. Unauthorized trades and missing funds on your statements are on FINRA’s list too. Raise them in writing straight away.
A strategy no one can explain simply. If you can’t repeat back how the investment makes money after the advisor explains it, don’t buy it.
No registration. Anyone advising on or selling investments should show up on the SEC’s adviser search or BrokerCheck. Our guide on how to check a financial advisor’s record walks through it.
Serious: signs of a conflict that costs you
These usually aren’t illegal. They’re signs the advice may be shaped by what pays the advisor.
Products that pay them come first. Annuities, permanent life insurance and funds with sales charges can all pay the advisor a commission. If those keep coming up, ask what the advisor earns on each and what a no-commission alternative would cost. A fee-only advisor earns nothing on products, which removes the question.
Replacing a policy or annuity you already own. Swapping one contract for another can mean a new surrender period for you and a new commission for the seller. Ask for the cost of the old contract, the new one and leaving, side by side, in writing.
A lot of trading in a commission account. Brokers have to believe a series of recommended trades isn’t excessive, even if each one looks reasonable on its own. Count the trades on your statements. Frequent buying and selling that earns commissions without a clear reason is worth asking about.
A cost they won’t put in dollars. You should be able to get one number for the year: advisory fee, fund costs and any commissions. Fee-only firms that publish prices charge a median $4,500 a year for ongoing planning or 1% of assets, so you have a benchmark. See how much a financial advisor costs.
“Fee-only” on the website, commissions in the filings. The label isn’t protected. Form ADV is what counts; our guide to telling whether an advisor is fee-only shows the four lines to read.
A record they didn’t mention. In a study of all US financial advisers from 2005 to 2015, those with past misconduct were five times as likely as the average adviser to commit more. One old dispute is not a verdict. Several, or one they hid, is.
Letters you can’t look up. FINRA warns that some designations “require little experience, study or continuing education.” Its designations database shows what each requires and whether it can be verified.
Worth fixing or leaving: signs of poor service
None of these is misconduct. All of them mean you may be paying for less than you think.
- No written plan. After the first few months, you should have one, and it should change when your life does.
- Every meeting is about markets. Good meetings are about your decisions: retirement date, taxes, withdrawals, insurance, the house.
- No tax thinking. An advisor who never asks for your tax return can’t be planning around it.
- The same portfolio as everyone else, whatever your age, goals or taxes.
- Slow or no replies. A few days is reasonable. Weeks is not.
- You’ve been handed off to someone junior without being told.
- The fee grows but the service doesn’t. A percentage fee rises with your balance. If the work hasn’t changed, ask whether a flat fee would fit better. Our guide to whether advice is worth paying for has a yearly check.
What to do if you see a sign
- Write it down. Dates, amounts, what was said. Keep every statement and email.
- Check the custodian directly. Log in to the custodian’s own website, or call them, and compare with what the advisor reports.
- Ask in writing. “How are you paid on this?” “Why this trade?” “What does this cost me in dollars?” Clear answers in writing settle most worries.
- Raise it with the firm. Contact the branch manager or compliance department, in writing.
- Report it. For a broker, file a complaint with FINRA. For an adviser, contact your state securities regulator or the SEC. Suspected fraud of any kind can go to the SEC.
- Move carefully. If you decide to leave, don’t cash out first. Our guide to switching financial advisors covers moving accounts without fees or taxes you don’t need to pay.
The next advisor should pass the same checks before you sign. Our questions to ask a financial advisor help you hear the difference in a first meeting.