Planning your future often requires turning to a financial adviser whom you can trust as a fiduciary for guidance on personal investing, college trusts, income tax preparation, insurance, retirement planning, or estate planning.
Most financial advisers strive to help their clients invest their money in areas that generate rich returns because they themselves tend to accrue commission on the positive returns. The more money financial advisers can make for their clients, the more money they are able to make for themselves.
However, there are certain practices that some financial advisers may partake in that can effectively cheat their clients. If you are worried that your financial advisor may be ripping you off, here are some warning signs to look for when trusting your financial adviser with your money.
Key Takeaways
- Planning your future often requires turning to a financial adviser whom you can trust as a fiduciary for guidance on personal investing, college trusts, income tax preparation, insurance, retirement planning, or estate planning.
- If you are worried that your financial advisor may be ripping you off, there are some warning signs to look for when trusting your financial adviser with your money.
- Ensure all the statements you receive from the custodian have only your name appearing on the account.
- If your financial adviser tells you of an investment that offers you a high return with low risk, and you instead notice your returns are staying pretty consistent, your investment could be tied into a Ponzi scheme, which generates returns for former investors by using the funds from newer investors.
1. Commingling Names on the Title of the Account
If your financial adviser commingles or adjoins their name, alongside yours, on the title of your investment account, it grants them unrestricted authority to use the funds at their discretion.
Ensure all the statements you receive from the custodian have only your name appearing on the account. The code of ethics for the Certified Financial Planner (CFP) Board of Standards, Inc. outlines commingling as a violation of the Securities and Exchange Commission's (SEC) Code and
Practice Standards, whereby any violation warrants disciplinary action such as potential revocation for the certificate holder to use the CFP certification marks after their name.
2. Churning on Your Account
If on your statement, you notice a large number of trades occurring or an increase in transactions on your account without any substantial increase in value, your financial adviser could be churning on your account.
A financial adviser, or specifically a broker, does this to increase their own commissions as they are usually paid whenever they buy and sell a security. A way to avoid churning on your account is to open a wrap account where a flat fee is charged periodically instead of one based on trade transactions.
3. Scamming
If your financial adviser tells you of an investment that offers you a high return with low risk, and you instead notice your returns are staying pretty consistent, your investment could be tied into a Ponzi scheme, which generates returns for former investors by using the funds from newer investors.
Moreover, Ponzi schemes are often a part of affinity fraud, which entails inflicting the scam upon members of certain groups, such as an ethniccommunity, religious community, or the elderly. To avoid this, confirm that your investments and financial advisers and their respective firms are registered with the SEC (since the majority of Ponzi scheme investments involve unregistered firms).
Seek out financial advisors or planners with designations such as certified financial planner (CFP), chartered financial analyst (CFA), or chartered financial consultant (ChFC).
4. Embezzling
If your financial adviser insists you play a minimal role in your investments and let them deal with the "burden" of your account, since it is their job, they likely want to obtain from you a power of attorney to act on your behalf for decisions involving your investments.
This opens up great risk for the safety of your assets since your financial adviser is then able to legally trade upon your securities and move the return or the security itself into any account they choose.
To your greater detriment, your adviser could also transfer your money into their personal accounts, and although this act is illegal, it is costly and timely for you to pursue after the fact.
To avoid this happening, never grant power of attorney to your adviser. If you must, however, stipulate in a power of attorney agreement that upon granting power of attorney, your financial adviser is only permitted to trade your securities without notifying you but never permitted to draw upon returns or move assets from their original accounts.
To protect your investments, be cautious when entrusting your money to others. Always validate your financial adviser's credentials, background, and ethics record.
What Exactly Does a Financial Advisor Do?
There are a few responsibilities that financial advisors have. They will provide investment management services, helping you find the right investments for your risk profile and devising an investment strategy; debt management services, to help you pay down your debt and avoid accumulating future debt; retirement planning; estate planning; tax planning; college savings planning, and budgeting.
How Do Financial Advisors Get Paid?
The payment structure for financial advisors can vary but they earn money either through commissions or fees. Advisors are either kept on retainer while others work per deal or hourly. Some charge per transaction or an hourly fee while others may charge a percentage of the total assets they manage for you.
Is It Worth Paying for a Financial Advisor?
Whether or not it is worth having a financial advisor will depend on the individual and is a personal decision. Financial advisors can be helpful if your financial profile is complex. For example, if you have multiple income streams, own a few houses, are expecting an inheritance, and are saving for a few kids to go to college, a financial advisor could help you manage it all.
The Bottom Line
There is always going to be inherent risk in trusting your money with another person. Financial advisors are meant to take care of your money but it doesn't mean each and everyone will always have your best interest at heart. Pay attention to the above signs regarding your financial advisor to know if your hard-earned money is in good hands.
