It’s hard to know what to look out for as an investor. My experience with many types of investment management and financial advisory firms has given me a fairly unique experience seeing a wide range of issues with different business models.
If you’ve got a feeling there’s something strange happening with your investment, here are just a few things to be on the lookout for:
If the prospectus is longer than a novel, you can be sure there are plenty of disclosures in the small print that explain the many conflicts the provider has. One area independent advisors have struggled to make headway is in educating the public on all of the conflicts of interest involved in the investment products that brokers and their employers sell. And, keep in mind you pay the printing expenses for all of those phonebook sized novels, and all the printing and mail costs of their regular updates.
If you can’t get out, you don’t need it. Any investment you can’t get out of without a surrender charge, you don’t need. Penalty schedules are used to make sure the large commissions on these products paid to advisors won’t be wasted before the product provider recoups them. And, if there is a penalty schedule, those commissions are much higher than competing products, which is another reason to avoid this product. Bank CDs are about the only exception to this rule.
If it requires a story to sell it, you’re being sold something you don’t need. If you’re always being sold a new investment idea at your meetings with your advisor, it’s important to notice you’re always being sold. Develop a basic understanding of investments, and start to ask questions.
If the fees are above average, you can also assume the fees are much higher than you think. Funds that don’t care to do enough to reduce their visible management fees also aren’t the types to reduce the ones you don’t see. They also are not the type whose managers invest in their own funds - another obvious red flag.
If you are making changes every meeting, your advisor may be making moves to justify their job. This is unfortunately one of the most common red flags I’ve come across. If you are changing funds at every meeting, start to question the reasons why.
If your advisor is with a broker, they are not required to act only in your interest. A broker is required to sell you something suitable. What is suitable? Well, if you said you were in the market for transportation, you might have someone sell you a tricycle, Porsche 911, or a 78 foot luxury yacht.
If you are buying funds on your brokers “preferred” fund list, you’re in trouble. These funds pay (and charge you) for the right to be sold to you. Read all of that paperwork your advisor gives you to find out if their fund choices may be influenced by decisions other than what’s right for you.