Why Do So Many Investors Select Bad Financial Advisors?

Why Do So Many Investors Select Bad Financial Advisors?Bad financial advisors are dangerous because they are not necessarily bad people or criminals like Bernie Madoff. In fact, they could be nice people who belong to your church or country club.

They are bad advisors because they provide bad financial advice that produces bad results. Or, they sell bad products that have inherent conflicts of interest. Or, they are simply doing what they were told by their companies. Or, they do not know how to provide good advice.

No Warning Labels 

Unfortunately, financial advisors do not come with warning labels. For example, “This advisor cannot be relied on to provide competent, ethical advice”. It is your responsiblity to ask the right questions, know good answers from bad ones, and identify potential conflicts of interest that could damage your financial interests.

No Mandatory Disclosure 

Financial advisors do not have mandatory disclosure requirements. This puts even more pressure on you to obtain the information you need to make the right decisions. On a more onerous note, no mandatory disclosure also opens the door to manipulation. Financial advisors provide information that makes them sound like investment experts and they withhold information that would cause you to reject their sales recommendations. If you ask the right questions, you are asking for information that is being withheld from you.

Personalities 

If you asked 100 investors why they selected particular advisors at least 50 of them would say their advisors are very nice people. In fact, many investors refer to advisors as friends. This creates a feeling of comfort because they believe a friend will take better care of their assets than a non-friend. This is a very risky decision process, when your money is involved, for two primary reasons:

  1. Advisors want you to like them. You inherently trust people you like. Trust makes it easy to sell investment products
  2. Nice people can still be incompetent or unethical

Sales Skills 

Most investors know financial advisors have to sell to win new clients. However, what if sales are the advisors’ primary skill set? It is critical that you identify the advisors’ principal skill sets. You want an advisor who is a planning or investment expert, a good communicator, and a professional who keeps commitments. This means the advisors’ primary skill sets have to be: Planning, investment, insurance, and/or tax. You do not want a salesman investing your assets.

Undocumented Sales Claims 

Undocumented sales claims are worthless. Therefore, avoid advisors who make excessive sales claims, but do not provide documentation that confirms the claims.  Anyone can make verbal sales claims that help them sell financial products and services. In fact, the bigger the claims the more suspect they are. They fall into the category of too good to be true. How do they get away with making these claims? The information is verbal. There is no record so it is your word against the advisors if there is a future dispute.

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