WARNING: How To Spot A Bad Advisor

Written by John Stuart on July 6th, 2016

WARNING: How To Spot A Bad Advisor

It was easily one of the most devastating things I’d ever seen.

Most people think it’ll never happen to them.

It happened to my grandfather…

He’d spent his entire life building his wealth and retirement pot, only to watch it vanish before his eyes.

He lost R19 million because of an advisor’s negligence.

Every penny, every rand, gone.

Imagine that was you?

That’s why I want to show you the six things I witnessed back then that could show you how to spot a bad advisor.
 

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6 Ways To Avoid A R19million “Apology”

 

If you see your advisor doing these six things, I’d highly suggest you consider your options.

My grandfather never had a choice (or a chance), but you do.

 

Bad Advisor Trait #1: Aggressively Pushing Product

Advisors are there to sell advice.

Not to aggressively promote and push products.

If this happens, you need to ask yourself why.

Are they getting a bigger slice of the pie by pushing a product onto you, as opposed to the one that pays out a little less but is actually the right fit.

Advisors who want to aggressively sell you a product rather than their advice have moved into the realm of unethical behavior.

Any advisor who aggressively pushes a product on you is doing it for their gain, not yours, and you should steer clear of them.

 

 

Bad Advisor Trait #2: Trying To Tell Your Fortune

I don’t care who you are in the market…

Nobody can claim to know what’s going to happen next.

And anyone that does is lying to you.

Interest rates… Where the market will go over the next six months… the perfect stock ripe for the picking…

Avoid these charlatans.

Any advisor worth their salt will tell you that the markets are unpredictable, and that no one knows for certain where they’re headed.

Avoid the ‘fortune teller advisor’ like the plague.

 

Bad Advisor Trait #3: Throwing Big Words At You

If there’s one thing I really dislike about the financial industry is that it’s filled with people who think you’ll never “get it” and that they’re better because of it.

The financial world isn’t some private gentlemen’s club reserved for the elite… much like these people want you to believe…

Anyone with a desire to understand it and work hard at it can do well.

There’s a reason why more than two thirds of Unit Trust managers in SA fail to outperform the market over the long term (but that’s another story for another day).

You should feel comfortable with your advisor, which is why if you find one that communicates things to you in a verbose, complex and over the top way, you need to be cautious.

If an advisor cannot explain an investment process to you, how their fees are charged, or their investment philosophy in a way that’s easily understood, I’d steer clear.

 

Bad Advisor Trait #4: Flashing The Cash

Flamboyance, for me, has no place in the financial world.

The irony is that you immediately connect flashy suits and cars to the investment world don’t you?

Those that ‘smell like money’, have a flamboyant lifestyle and office, and throw around industry jargon like they’re smarties tend to promote more than they advise.

Remember that when you come across the ‘slicker than slick’ type.

You want someone who cares about your investments, not someone who’ll place their flash over your cash.

 

Bad Advisor Trait #5: Poor Performance

This is possibly the easiest ‘tell’ of the lot.

If an advisor has poor performance when compared to their benchmarks, it means they’re underperforming (and ultimately losing you money).

We call this an opportunity cost.

By choosing to go with Advisor A, you lose out on the growth you would’ve received from Advisor B.

Past performance with regards to their benchmarks can help you pinpoint advisors who have investment management skills and those that simply don’t!

 

Bad Advisor Trait #6: Reporting Fluctuations

Any advisor who changes the way they report on their performance deserves a red flag!

You need to ask yourself why they’re doing this…

More often than not it’s to hide something or cover up bad performance.

Your returns are vital so you need to pay seriously close attention to the rate of return.

I’ve found there tends to be a lot of room for manipulation in this regard, and have even seen some switching to formats that they feel make them look better.

For example, if an advisor knew they had a poor 2010, they could choose to only show you their performance dating back to early 2011.

Some advisors even change benchmarks to make their performance look better.

Remember, you’re not going to be with an advisor for 3 or 4 years – Ideally you want to be with them for the long haul (because they’re good).

So keep this in mind when evaluating an advisor.

 

How To Avoid A Bad Advisor In 6 Simple Steps

 

Unfortunately, a bad advisor doesn’t come with a warning label.

Nor do they have a specific ‘look’ you can keep an eye out for (despite what those Hollywood sitcoms make you believe).

It’s far easier than you think to get hoodwinked by one!

My grandfather was a smart man – To build up a retirement pot of R19million in the 90’s was no mean feat.

So you need to do everything in your power to make sure you don’t fall victim to similar circumstances.

Remember, you need to watch out for the advisor who:

  • Aggressively pushes product on you
  • Claims to be a fortune teller
  • Throws around jargon
  • Flashes the cash like an 80’s kingpin
  • Has a poor track record
  • Changes their performance reporting

Make sure you find someone who doesn’t raise these red flags and you’ll be ok!

Until then, here’s to profitable investing.

John Stuart

John Stuart
Content Director
The Money Lab