Tips for Avoiding Bad Financial Advice

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1 Tips for Avoiding Bad Financial Advice This guide is a free public service from Paladin Registry. It contains information that will increase your awareness about issues that concern advisors and help you avoid the risks and consequences of bad financial advice. This guide is for information purposes only. It is not intended to be any type of financial, tax, or legal advice. We strongly suggest you contact a qualified professional before you make any decisions that impact your financial future.

2 Why is selecting a financial advisor a major financial risk? There are 650,000 registered advisors in the U.S. 85% are sales representatives who are paid commissions to sell investment and insurance products. They are not paid to help you achieve your There is a huge range in the quality of advisors and they don t have to disclose information about their credentials, ethics, and business practices. Range in quality and no disclosure requirements combine to create a major financial risk for you. Why is selecting the wrong advisor my biggest financial risk? Bad advice is a bigger financial risk than the volatility of the stock market because it impacts all of your financial decisions. For example, how much you save, how much you spend, how you invest, your amount of withdrawals, your exposure to risk, and more. What is bad financial advice? Any advice that causes your results to lag benchmarks, creates additional risk, reduces liquidity, or causes excessive expenses is bad advice. Who provides bad financial advice? Incompetent and/or unethical advisors provide bad advice. Incompetent advisors may provide bad advice because they don t have the knowledge to provide good advice. Unethical advisors provide bad advice because they make more money. The most dangerous form of bad advice occurs when it is given by a likeable person who is easy to trust. What are the key elements of incompetence? Incompetent advisors lack education, certifications, and/or experience. They have had sales training, but not training that increases their financial knowledge. What are the key characteristics of unethical advisors? They have numerous client complaints on their compliance records. All of the information they provide you is verbal so there is no written record. They refuse to provide documentation for their credentials, ethics, and business practices. They may be competent advisors, but they make more money when they put their interests first. Why is bad advice so devastating? You may not notice bad advice that occurs over longer time periods, until you have suffered significant losses. Bad advice undermines the achievement of your goals for example, a comfortable, secure retirement. A high percentage of investors are in denial about the quality of advice that they receive from advisors they like. Why is bad advice so hard to avoid? Ethics and competence are hard to measure. Low quality advisors outnumber good advisors 9:1. Bad advisors use personalities and sales skills to appear to be good advisors. You don t expect people you like or trust to abuse that trust to make more money. Advisors, who appear to be nice people, may provide bad advice because they are incompetent or unethical. Investors use subjective selection processes, so it s easy for advisors with good sales skills to convince investors they are experts. Why is bad advice so expensive? The expense of good advice is offset by better results. The expense of bad advice is not offset by better results. What are high risk ways for selecting advisors? Selecting advisors who solicit you. Selecting advisors who are referred to you by sources who may not know a good advisor from a bad one. Buying products from advisors over the telephone. Selecting advisors who say their services are free. Selecting advisors who are not RIAs, IARs, or fiduciaries. Selecting advisors who refuse to document their credentials. Tips for Avoiding Bad Financial Advice Page 1

3 Why are there so many abusive sales practices in the financial services industry? How do I check the ethical histories of financial advisors? It s all about the money. Companies and advisors can make more money doing what s best for them versus what s best for you. What are the best ways to avoid bad advice? Go to the NASD s website at and click on Investor Information / Check out Brokers and Advisors. Knowing the professional s CRD number will make the search much easier. You should also check with your state s securities and insurance commissioners. Take an hour or two to learn how to select high quality advisors and avoid bad advisors. Buy what you see and not what you hear. Use an objective selection process that minimizes the impacts of advisor personalities and sales skills. Focus on the advisors credentials, ethics, and business practices. Ask for all important information in writing. Aren t planners and advisors required to tell the truth? They are supposed to tell the truth, but, there is no way to monitor what they say during meetings or phone calls. Lower quality advisors can make more money when they misrepresent or omit information about themselves. They know you won t buy from them if you know the truth. Verbal information is easy to deny later when it s your word against the advisors. You always want important advisor information in writing so you have a permanent record of what was said to you. If all advisors market themselves as experts, how do I know who the real experts are? All planners and advisors market themselves as financial experts to win your trust and assets. Only a small percentage of advisors are real experts based on education, certifications, and experience. You can protect your interests by requiring advisors to document their sources of expertise in writing. What if my planner recommends all insurance products as investments for my assets? Your planner is really an insurance agent. Have another professional check the quality of your plan. How do personalities and sales pitches increase my risk of not achieving my financial goals? Most bad advisors rely on their personalities and sales skills to win your trust and assets. You may end-up selecting the best sales person and not the best planner or advisor. Personalities and sales skills have nothing to do with competence and integrity. Telling you what you want to hear (high return, low risk) may sound good, but it s a deceptive selling practice. You never want a sales representative planning your future or investing your assets. What are conflicts of interest? A conflict of interest occurs whenever an advisor or company puts their need to make money ahead of your need to achieve your For example, a conflict occurs when a sales representative sells you proprietary products even though the products have poor track records and high expenses. At the core of all conflicts of interest is the reality that advisors and companies make more money doing what s best for themselves vs what s best for you. Do titles that are used by financial representatives matter? No, they do not. Anyone, regardless of education and experience can call themselves financial planners, advisors, or consultants. For example, some financial consultants used to be called stockbrokers and some planners used to be called insurance agents. They changed titles so it was easier to market what they were selling. Appropriate credentials had nothing to do with their use of titles. Tips for Avoiding Bad Financial Advice Page 2

4 What types of advisors have the greatest potential for conflicts of interest and bad advice? Advisors who are employees of companies that determine what is to be sold to investors. For example, brand name firms. Advisors who are paid with commissions and not fees. Advisors who are new to financial services, but don t disclose that information because it would cost them sales. Advisors who are securities licensed, but are not RIAs or IARs. Advisors who are not acknowledged fiduciaries. Advisors who do not document their credentials, ethics, and business practices What are some mistakes I can avoid when I select a financial professional? Don t select advisors for their personalities. Less ethical advisors want you to like them so you will drop your guard and turn your assets over to them. Personalities have nothing to do with competence and integrity. Don t select advisors based on their sales presentations. When advisors control information you only hear what they want you to hear. Don t put too much emphasis on the companies that employ advisors. You are hiring a professional and not a company. Don t select advisors who refuse to document their credentials, ethics, and business practices in writing. Don t select advisors who try to limit your choices to products that are produced by their companies or particular companies (one mutual fund family). They are limiting your choices to benefit themselves. Don t select advisors who refuse to provide full disclosure for all of their compensation. Don t select advisors who offer free services. There are no free services. Free means a third party is paying commissions to the advisor. Don t select advisors who are only Series 6 licensed. This is a low level license that s held by sales representatives. Why should I avoid advisors who want to be paid with commissions? This type of advisor is paid to sell investment and insurance products. The advisor is not compensated to help you achieve your Commission payments come from third parties and not you. There is a high probability the third parties interests will supersede yours. You still pay for commissions because companies increase the fees they charge you to recover their commission expenses. Advisors are paid upfront at the time of the sale. They have no vested interest in the achievement of your A 5% commission that is paid at the time of the sale is equal to five years of a 1% fee. Am I safer if I use the services of an independent planner or advisor? There is a high probability you are safer if the professional has the following characteristics: Registered Investment Advisor or Investment Advisor Representative Acknowledged fiduciary Clean compliance record A substantial amount of education and experience The advisor is compensated with a fee The advisor provides sophisticated wealth management services What does independent mean and how does it benefit me? The advisor works for you and not a company. An independent advisor is self-employed as an RIA or is an independent contractor (IAR) for a registered firm. High quality, independent advisors don t have employers telling them what to sell you. High quality independent advisors provide openarchitected solutions that don t limit your choices. High quality independent advisors have fewer potential conflicts of interest. Not all independent advisors are high quality. Tips for Avoiding Bad Financial Advice Page 3

5 Am I exposed to additional risks if I use the services of brand name planners and advisors? You should be very careful. Just because you have heard of an advisor s company doesn t mean the advisor is a competent ethical professional. It pays to remember you are hiring an advisor and not a company. Brand name firms have paid billions of dollars in fines for cheating investors. Thousands of brand name firm executives and advisors have gone to jail or left the financial services industry Brand name firms pay hundreds of millions of dollars per year to lobbyists to make sure legislation favors them and not you. Brand name firms are public companies so their first allegiance is to their shareholders and not you. Advertising on TV, to create brand awareness, is expensive. They have to generate a lot of revenue from your assets to offset this expense. Brand name firms have more potential conflicts of interest than independent professionals. For example, they manufacture their own products. Where can I go to obtain additional information about protecting my financial interests from bad advice? You can go to / Tips-4-Investors (on the home page). The Tips are free and no registration is required. Where can I go to find high quality, trustworthy professionals who can help me achieve my financial goals? You can go to / We Find Advisors for You (on the home page). The search services are free and there is no obligation. About Paladin Registry PaladinRegistry.com provides free public services to investors who rely on professionals for the achievement of their Registry services include education, advisor search, and advisor documentation. You can contact Paladin Registry by sending an to info@paladinregistry.com or calling (877) Tips for Avoiding Bad Financial Advice Page 4