Financial Advisor Red Flags: When to Walk Away from Your Advisor

In this article, we’re sharing five financial advisor red flags that may be an indication it’s time to move your business elsewhere.

As your financial life gets more complicated, it’s only natural to seek advice from a trusted professional. Ideally, you’d like to delegate your personal finances to someone who’s highly skilled and trustworthy. But finding and hiring the right financial advisor isn’t always easy.

There’s no shortage of people calling themselves a financial advisor these days. According to the Bureau of Labor Statistics, there were over 260,000 personal financial advisors in the United States as of May 2021. With so many so-called financial advisors out there, how can you avoid entrusting the wrong person with your money—and financial future

Beware of the following five financial advisor red flags:

Red Flag #1: They’re not a fiduciary.

You may be surprised to learn that not all financial advisors act in their clients’ best interest. In fact, only financial advisors that hold themselves to a fiduciary standard of care must legally put your interests ahead of theirs.

Meanwhile, broker-dealers, banks, and insurance companies typically hold their financial advisors to a less stringent “suitability” standard. In other words, these professionals may be considering other factors when making investment recommendations—for example, their commission.

Keep in mind that in the United States, registered investment advisors (RIAs) must act in a fiduciary capacity. In addition, financial advisors who are CFP® professionals follow a strict code of ethics that requires them to put their clients’ interests first.

Red Flag #2: They can’t explain their fees clearly.

In general, financial advisors are compensated in client fees, sales commissions, or both.

Fee-only financial advisors are paid directly by clients—and only by clients—for their services. These advisors often have a straightforward fee schedule they can show you, so you know exactly what you’ll pay for their services before committing. In addition, fee-only advisors have no hidden fees.

Why is this important? A fee-only compensation structure helps ensure that the financial advisor’s interests are in line with yours. For example, if the advisor charges a percentage of assets under management, their compensation only increases if your assets appreciate.  

On the other hand, fee-based (yep, there’s an important difference between fee-only and fee-based) or commission-based compensation structures can both be financial advisor red flags. These advisors may earn part or all of their compensation in sales commissions. In other words, they may be more incentivized to sell products than give advice. And since they’re paid on commission, it’s far more difficult to understand the cost to you ahead of time.

Red Flag #3: They’ll take anyone as a client.

Many financial advisors limit who they’ll accept as clients by setting minimums on investable assets, net worth, or fees. While this helps ensure their firm remains profitable, it also allows them to take on fewer clients so they can provide more personalized service.  

Meanwhile, having no minimums or new client criteria can be both be financial advisor red flags. If this is the case, you may want to ask the advisor more about their practice. Low AUM may indicate that their business isn’t stable or sustainable. Alternatively, too many clients may limit the amount of personal attention you’re likely to receive.

Depending on your personal or financial circumstances, you may prefer to work with a financial advisor who specializes in serving clients like you. When your advisor has expertise in a certain type of client, they’re more likely to understand your needs and anticipate future challenges.   

Red Flag #4: They don’t answer their phone or respond to emails.

According to a recent Vanguard and Spectrum Group study on why high-net-worth individuals fire their financial advisors, four of the top five financial advisor red flags all have to do with communication.

In general, a financial advisor should meet with you formally at least annually to review your investment plan and progress towards your financial goals. However, life changes and other circumstances may warrant more frequent contact.

If nothing else, you should feel confident that your financial advisor will be available and responsive when you need them. If you call or email and don’t hear back—or only hear from their assistant—this may be a sign it’s time to find a different advisor.

Red Flag #5: They don’t have a clean regulatory history.

Lastly, make sure any financial advisor you’re considering has a clean history. Licensed financial advisors and RIAs must make regulatory deficiencies available to the public. Depending on the circumstances, a negative public disclosure may be one of the biggest financial advisor red flags there is.

To research this information yourself, you can leverage free tools like FINRA’s BrokerCheck and the SEC’s Investment Adviser Public Disclosure website. These websites contain information about past regulatory issues as well as the outcome (unless the outcome is pending). They will also give you more insight into an advisor’s history and how they run their business.

Bottom Line: Consider all Potential Financial Advisor Red Flags Before Entrusting Your Wealth to Someone

Naturally, this isn’t a comprehensive list of financial advisor red flags you may encounter. However, if you notice any of these red flags when interviewing or working with a financial advisor, it’s probably a sign you should find someone else to entrust with your wealth.

Additionally, pay attention to your overall comfort level and chemistry when meeting with a financial advisor. Do you like them? Do they ask good questions and listen to your responses? Most importantly, do you trust them? Ultimately, you should feel completely confident that your money and future are in good hands.

Regarding the points above: Pearl Financial Planning LLC is an RIA and Gretchen Behnke is a CFP® professional, both of which mean we always hold ourselves to a fiduciary standard of care. Pearl is a fee-only firm serving a client base of professional women and couples who want to build wealth. We don’t have an asset minimum but we do have a minimum fee to ensure clients are a good fit. To learn more about how our services can help you confidently build the life you want, read our About page or request a complimentary consultation. We’d love to hear from you.