10 Ways to Sniff Out Bad Financial Advice

Beware of Free Credit

Douglas Goldstein, author of Building Wealth in Israel: A Guide to International Investments and Financial Planning, says the sales pitch that’s in vogue right now is telling people to buy things with low (even zero) interest rates. “Though it may sound good, clients get swept away with the low monthly payments, never realizing how devastating the debt can be to their long-term financial health,” says Goldstein.

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Beware When It's Too Good to Be True

“If it’s too good to be true, it probably isn’t,” says Wayne Spivak, CFO with SBA Consulting in New York. Along the same lines, he recommends asking the person who gave that advice “if no one knows about it, why do you?” Greed clouds even the most logical of minds sometimes, Spivak says. “Just look at the plethora of scams that hit your email inbox daily. You know someone falls for it.”

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Beware of Who’s Selling

Ken Stalcup, a CPA with Somerset CPAs in Indianapolis, Ind., says if the adviser who is offering you the big tip is a new, small, one-man or independent operation, consider investing very carefully.

“For the most part they are good advisers, but in some small organizations, there may be a risk that errors, irregularity or fraud can occur and go undetected for some time,” says Stalcup. “According to the 2010 Association of Certified Fraud Examiners the average fraud scheme goes undetected for 18 months. That's long enough to lose a lifetime of savings.”

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Beware of No Questions

Not only should you be asking a lot of questions about the adviser’s qualifications and advice they give, but they should ask you a lot of questions too, says Sean Dowling, CFP with The Dowling Group Wealth Management in Stamford, Conn. “Good advice usually comes after a lot of questions from the person giving advice,” Dowling says. “Thorough fact finding and information gathering to understand all the nuances of someone's financial life before dispensing advice.”

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Beware of Paying on Faith

Adam Koos, president of Libertas Wealth Management Group, Inc. in Columbus, Ohio, says that a client recently came to him with a story of being advised to pay for services before seeing where that money was going to be invested. It’s not good, says Koos, when an adviser tells you to pay him or her before showing you any prospectus or financial plan.

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Beware of No Risk

“Every investment involves not just returns, but risks,” says Chris J. DesBarres, co-owner of Help Unlimited, Inc. “If the person giving you advice cannot or does not tell you about the risks and tradeoffs, they either don't know what they are talking about, or they are just trying to push a product onto you.”

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Beware of Advertising

“If you heard about the investment opportunity from an ad on the radio or a direct mailer run the other way,” says Greg McGraime, CFP and author of an audio book series, Get Smart about Investing. “Great investment opportunities don't need to be advertised.”

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Beware of Your Adviser's Lack of Holdings

“I like to ask ‘how much of your own money’ have you invested in this company or business?. If the answer is either ‘none,’ ‘everything,’ or ‘my investment needs are different than yours,’ run, don't walk,” says Shane Fischer, an attorney in Winter Park, Fla.

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Beware of a Sure Thing

If a financial adviser is guaranteeing a return on your investment, that is a big red flag, says David Hefty, CFP and co-founder and CEO of Hefty Wealth Partners in Auburn, Ind. “There is no such thing as a magic investment that will guarantee returns, especially in this market,” says Hefty.

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Beware of Bundling

“Everything bundled in one place is a red flag,” says Paul Escobar, an investment and retirement consultant for Sloane McCarron Capital Advisors. “Good investments usually are thought up in one place, your money is held by an independent custodian or bank, and a third party reports your results.”

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