How to Spot Bad Financial Advice

Not all financial advice is good. Be discriminating.

Sep 5, 2014 at 1:01PM


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.


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.


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.


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 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 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.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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