How do you know if you can trust your financial advisor? It's a tough question, and one that several investors who have lost money after seeking out financial advisors ask.
Is your financial advisor legally required to act in your best interest, as a fiduciary? Not necessarily. The burden is on investors to protect themselves.
It isn't always obvious when a financial advisor is not acting in your best interests, but you should put up your guard if your advisor does any of the following:
Isn't candid about fees. Advisors should give you a clear sense how they make their money and what you can expect to be charged. It is not unreasonable to ask for a rupee estimate. All financial planners make money somehow, and the way they are compensated could raise conflicts of interest that you should know about. For instance, a planner who receives commissions has an incentive to sell you products that may or may not suit your interests, while a planner paid a percentage of your invested assets has an incentive to get you to invest all of your money with the firm. Your advisor should be upfront about their compensation and not try to tip-toe around this.
Pushes particular products or strategies. It's a bad sign if your advisor isn't willing to explain recommendations and consider other approaches. Be especially wary if he or she recommends a complex strategy that you do not fully understand.
Makes claims that are too good to be true. If the advisor assures you market-beating results or offers you high returns with no risk, watch out.
Fails to ask about your financial situation. It could be a sign of a one-size-fits-all service or a sales pitch if your advisor doesn't take the time to understand your current position and goals. Good advisors should ask you detailed questions about where you are and where you want to be. They should also be willing to discuss their experience dealing with similar cases.
Frequently changes recommendations for your portfolio. Frequent shifts can reveal a lack conviction or, worse, hunger for commissions from transactions.
Presses you to make decisions right away. If the advisor is pushing you to make an investment decision right after he or she pitches it to you, it's probably a sign you should sleep on it. Same goes for advisors trying to get you to turn your assets over to them on the first visit.