First, let’s define “bad financial advice” as advice that promotes the interest of the person selling the financial advice and/or products, rather than YOUR best interest.  Sometimes it’s not clear what the motives behind financial advice really are.  So how do you know? Here are few key signs to watch out for.   

  1. Limited advice: I believe there are almost always at least 3 means or methods to solve any financial need.  I believe that when an advisor only knows of one solution, that’s poor advice.  An example that comes to mind is a person on the radio who believed that a reverse mortgage could cure all financial ailments (and some forms of cancer). A reverse mortgage may be a solution for some financial issues, but it is definitely not a solution for every financial issue.   
  1. Everything’s perfect: Is the advice so perfectly tailored to everything you said you wanted, that the overall impression is nothing could possibly go wrong? I have yet to actually find that perfect unicorn in finance. Good advice means explaining the benefits AND the risks AND the costs of the financial decisions. 
  1. Little or no discussion of terms and expenses: How much is the advisor being paid is a fair question!  Are there restrictions on getting your money back? Or are there fees and expenses if you wish to liquidate the investment? What are the ongoing costs? These should be discussed transparently, up front. 
  1. Poor follow-up: A lot of salespeople have a great sales pitch. Then they disappear after the sale is done. The difference between a salesperson and a financial advisor, especially a fiduciary advisor, is the focus on follow-up. A fiduciary advisor should reach out with ongoing reporting of results, good or bad, as well as explanations and ongoing guidance – long after the initial conversation. 
  1. No skin in the game: Whenever an advisor presents you with a product or solution, I believe it is a fair question to ask whether the advisor has done this with their own money. If they have not, it is a fair question to ask why not. This can be very revealing.  

Final thoughts: A lot of bad advice can be avoided by simply asking questions.  You should ask about the benefits, but also about the risks and the costs.  Ask what the alternatives are to what’s being proposed.  Also, there’s absolutely nothing wrong with asking a financial professional for referrals, or checking with regulatory agencies to know more about the advisor and their firm.  Good clients and good advisors like questions.  So ask early and often.