Talk about risk in the financial services industry is everywhere. And I mean everywhere. This post on Investopedia refers to 11 different types of investment risk. To be certain, big dollars are spent by firms to promote their essential products and strategies you need to control your risk including insurance products, asset allocation programs, and other legitimate methods for consumers to protect the money they have earned and invested.
But is one of the biggest investment and planning risks you face simply the risk of getting bad advice? If so, it is not on the list and you will rarely hear about it from advisors. Duh. But there are so many examples of how getting bad advice is costly, why isn’t this listed as a real risk? Seriously!
What about people that have been swindled out of their money by Bernie Madoff or Charles Ponzi and his original “Ponzi’s Scheme” (a good read I would recommend), Tom Petters, or any number of scams? These are extreme cases, but getting garden variety bad advice from a financial advisor, though not financially devastating, can certainly be costly and could result in having less money than otherwise.
Of course, we can’t do everything for ourselves and rely on doctors, plumbers, auto mechanics, teachers, or any other number of professionals or trades people. Unless you move to the outback, it is highly likely your success in life is impacted by the performance of others. So I am not suggesting that you shouldn’t seek out the guidance of a professional for your financial matters – doing so can be a very wise move.
But as you begin to look for advice,or if you currently receive advice, here are some considerations on adviser risk:
What if the advice you receive is affected by how the provider is compensated? This one should be obvious, but it isn’t. Consumers should absolutely ask how an advisor gets paid and how much they make based upon their recommendation. You can also ask if there are any alternative ways for them to be compensated.
Does the advice sound too good? Is it filled with a bunch of sales jargon? The radio infomercials are the worst. It is discouraging that people fall for these. Many firms promote their unique insights and special techniques for helping investors. “Invest like the professionals” or “Learn the secrets of investing success.” If the advice is so good, particularly on investment ideas, wouldn’t the provider be better off keeping it to themselves and profiting from their knowledge? Of course they would.
Does the advice promote a new, hot idea? If so, be very, very cautious. This could be promoting something that does not have a substantiated history of performance through different market cycles.
I could go on and on but don’t need to – here is a good article on investment advice from a great blog, A Wealth of Common Sense.
Finally, when it comes to advice, I think this commercial from Charles Schwab is awesome! If we had the budget for a national advertising campaign, this would work well for PlanVision. While it speaks to compensation, it also could be applied to investment advice.