How to Spot Bad Financial Advice

Source: Deviant Art user rusrick.

The world is full of financial advice, and some of it won't serve you well. Here are some signs that will clue you in to bad financial advice.

Simplicity

If you're being told there's one simple way to improve your financial health, beware. For any financial goal, such as saving for retirement or college, there are usually multiple possible solutions. For example, you might stick to just stocks and bonds, or you might invest in fixed annuities, as well. Similarly, you might adjust your asset allocation over time manually, shifting some of your assets from stocks to bonds -- or you could put your assets in a target-date fund and let the managers do the shifting for you. Whatever you want to do, you usually have a variety of options.

Meanwhile, if a certain piece of financial advice is being presented as good for everyone, beware of that, too. For example, we're often advised to sock away 10% of our income for retirement. That may be sound advice for a young professional with decades to save, but someone who is a few years away from retirement and doesn't have a plump nest egg will need to save more aggressively. With a 401(k), for example, the annual contribution limit is a hefty $17,500 (or $23,000 for those 50 and older), which permits you to sock away a big chunk of your income in a tax-advantaged manner.

Complexity

On the other hand, some financial advice is so complicated and bewildering that we never truly understand it and are simply taking a chance if we go for it. Some advisors, for example, may push you to invest in commodities or the foreign exchange markets, but these can be very risky, especially if you don't understand them well. Similarly, some insurance products, such as index annuities, are too complex for the ordinary investor to grasp. You need to be comfortable with any actions you're taking. If any financial advice doesn't seem to make sense, even after you ask for more clarification, don't take it.

Missing information

Make sure the financial advisor is not leaving out important information, such as what fees you'll have to pay and what kinds of returns you can expect. Some shady types will stress relatively unimportant features such as 24-hour account access or a certain product's low risk, which doesn't mean much if the product offers only miniscule returns and carries high fees. Ask lots of questions, such as how inflation will affect your returns and how the product will perform in a bear market. Find out if your money will be locked up for a long time, or if you'll have access to it. If all of your questions aren't answered to your satisfaction, walk away.

Too good to be true

One last major red flag is when an investment seems too good to be true. If you're being promised hefty returns for stock investments, think again. Stocks do represent one of the most promising paths to prosperity, but they will not build your wealth in a straight line or at any guaranteed pace. Penny-stock pumpers fit this bill, sending investors mailed or emailed newsletters suggesting that a certain cancer-curing or oil-exploring company will double or triple in short order. That smacks of bad financial advice.

Urgency

If you're being pressured to make an investment or buy a financial product "before time runs out," then you may want to run out, too. While it's important not to procrastinate when it comes to saving and investing, don't take any actions until you've learned enough to be comfortable with what you're doing. You can learn more about personal finance here on Fool.com and in books such as The Bogleheads' Guide to Retirement Planning, as well as many other books. Focus on learning how the financial markets work, what they can do for you, how to profitably invest your money, and how to avoid mistakes. Know that investing can be much simpler than some financial pros would like you to think. 

What to do

You can avoid bad financial advice by taking a few steps. For starters, determine whether the guidance giver has any conflicts of interest. If a professional is selling you some insurance product, find out whether he gets a commission for doing so. Commissions can lead some advisors to recommend certain products even when others are more suitable for a client. You can find fee-only advisors, who earn no commissions, at the NAPFA.org website.

You might also ask a financial planner what her track record is and whether she holds a major financial license or designation, such as a Certified Financial Planner designation. Holding a "Series 7" license, for example, only means that she can sell you products that are "suitable" for you. They don't have to be your best bets or in your best interests.

You can also check up on any financial advisor you're considering. The Securities and Exchange Commission offers tips on how to check out brokers and investment advisors, while the folks at the Financial Industry Regulatory Authority (FINRA) maintain a BrokerCheck tool "to help investors research the professional backgrounds of brokerage firms and brokers currently or formerly registered with FINRA or a national securities exchange, as well as current or former investment advisor firms and representatives."

You'll run across a lot of financial advice in life. Bad financial advice can cost you a lot, so make sure you learn how to spot it. Consider doing much of your own financial planning and investing, too, if you have the time and interest.

Top dividend stocks for the next decade

The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 05, 2014, at 4:39 PM, notyouagain wrote:

    How to spot bad financial advice?

    Here's one way

    Pay attention to CAPS players with high ratings/scores although some of them got 99% of their points from ETF's and from red-thumbing crappy companies.

    When they actually do make a rare attempt at picking individual stocks, assume they are as good as their rating suggests and put your money where their mouth is.

    Repeat. Just in case that was just a fluke.

    LOL

    Watch one of them write an article recommending a dog of a dividend stock like SJW with a 70% payout ratio because "it's increased its dividend 63% in the last ten years" just a year after his article recommending dumping Hormel which had a dividend growth rate of 14.3%, has raised its dividend for 47 straight years, and has grown its dividend 60% in the last 3 years, yet still has a payout ratio of only 35%.

  • Report this Comment On September 05, 2014, at 5:34 PM, notyouagain wrote:

    The rest of you are outstanding, by the way. I love the Fool.

    But there is just the one (rhymes with "UltraWrong) that doesn't seem to understand long-term investing...at all. He doesn't even believe in it, and wrote a blog saying so before he became a writer for the Fool.

    ("The Life And Subsequent Death Of Buy And Hold Investing")

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3092945, ~/Articles/ArticleHandler.aspx, 10/25/2014 9:00:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...