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8 red flags when working with a financial advisor or insurance agent

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One of the most personal financial relationships you’ll ever have is with a financial advisor or insurance agent. These advisors get to know some of your deepest secrets, learn about your personal finances, and you’ll be trusting them with some major life events and the financial decisions they require. The right advisor can be one of your most valuable assets.

Conversely, if you choose the wrong advisor, you can suffer severe financial damage and personal angst. Years of hard work and accumulation can be partially or totally lost and cause irreparable harm to you and your heirs.

Fortunately, bad advisors have left many clues over the years that we can learn from. Here are eight red flags you should never ignore when working with a financial advisor or insurance agent.

1. The advisor talks more than they listen

An advisor who is in broadcast mode instead of information-seeking mode, especially during your first meeting, is indicating that they are more important than you are. It should be the other way around — the goal of any meeting is to help you, the client, be heard and your goals accomplished. A narcissistic advisor will ultimately be putting their needs ahead of yours.

2. The advisor is either inexperienced or incompetent

Let’s deal with each of these traits individually.

An inexperienced advisor isn’t necessarily a bad person, but is it someone you want on your team of trusted advisors, working in tandem with your accountant, investment broker, or estate planning attorney? An inexperienced advisor working with an experienced colleague is fine, but you don’t want someone with a new license driving your Ferrari.

An incompetent advisor is even worse. They have either chosen a company to work with that hasn’t sufficiently trained them or didn’t engage with that training and learn their trade. Either way, if they’re in the dark on their processes, products, and procedures, they’re going to lead you down the wrong path.

Instead, work with someone who has some credentials, preferably designations such as Certified Financial Planner (CFP), CLU (Chartered Life Underwriter), or ChFC (Chartered Financial Consultant).

[ Related: 6 common designations in finance, explained ]

3. They boast about beating the market by themselves

It takes a team to “beat the market,” that is, perform above market averages like the Dow Jones Industrial Average or the Standard & Poor’s 500 Average. Very few individual stock pickers can consistently provide above-average returns with a reasonable amount of safety.

Instead, consider advisors that recommend mutual funds with a history of outperforming the market averages and are under the control of experienced and successful fund managers. An advisor who tells you that they will personally be managing your investment account should be avoided.

4. They brag about having hundreds or thousands of clients

Your financial advisor or agent is going to be your household Chief Financial Officer (CFO). As such, they need to know you and your situation personally.

A bank or brokerage that assigns an advisor or agent 500 or 1,000 clients is setting them up to become unavailable or too busy to help you, which is why so many advisors are never heard from again after they win your business.

5. They have a spotty professional or personal record

No professional can make everyone happy all of the time — conflicts arise. This can lead to an advisor having a complaint on their record. One may be understandable (get the facts concerning the complaint from the entity, like the SEC, FINRA, or state insurance commissioner that it was registered with), two could be coincidental, three is a trend. You can find this information on these organizations’ websites.

Also, check for personal bankruptcies. It’s hard to have a lot of confidence in someone managing your finances that hasn’t proven they can manage their own.

6. They’re too focused on pushing products

A product-driven advisor is more of a salesperson than someone on the same side of the table as you. They’re usually motivated either by earning a commission or hitting a sales quota (or both).

Beware of investment advisors pitching annuities being the best investment you can make, even though annuities can be useful in some situations. Also, look out for insurance agents that are trying to sell you on how their variable life insurance policy is more of an investment than it is anything else.

And, product recommendations should come after the first meeting, if not later. An advisor trying for a “one call close” is like someone looking for a “summer romance.” It will end in heartache for someone — probably you.

7. They're commission-based

Advisors are usually compensated in one of two ways: they are either paid a flat fee for their financial plan and investment portfolio management or paid a commission by a company they have an arrangement with.

A fee-based advisor is more likely to provide you with unbiased advice on reaching your financial goals since they have nothing to gain by selling you a product. On the other hand, the advisor paid by commission from an insurance or investment company for selling you a product will not have your best interests in mind (they have to get paid for their time somehow).

[ Related: How do financial advisors get paid? ]

8. They represent only one company

In financial industry jargon, an advisor or agent representing one company is considered “captive.” This is because they are compensated by a single company that directs their actions and provides them with incentives to be captive. These incentives can be higher commissions or fees, office space, staff support, insurance and retirement benefits, and more.

An advisor or agent who works independently and represents multiple companies that compete with each other can provide you with much more objective recommendations that are in your best interests, not theirs.

A final thought

This article isn’t intended to paint all financial advisors or insurance agents with the same dirty brush. For every unscrupulous advisor out there, you’ll find dozens that will always put your needs above theirs. The trick is to find out who the wolves are, which can be done by doing your homework online or working with an advisor that comes highly recommended by someone you know well and trust.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published January 6, 2022
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