Your financial advisor is someone whom you trust to have your best interests at heart. When they act dishonestly, it can cost you more than dollars and cents. Financial advisors often prey on first-time investors and older people, but even seasoned investors can sometimes fall victim.
When scams happen, they often deprive individuals and families of years, if not a lifetime, of hard-earned savings. A scam may even cause some to lose faith in the financial system, leading them to miss out on legitimate opportunities to build wealth.
Dishonest financial advisors aren’t always easy to spot, but there are a few common signs you can look out for in order to protect yourself.
1. Overpromising Returns
Guaranteed high returns with little or no risk simply do not exist in the market. Generally, the higher the returns, the more risk an investment endeavor involves. Anyone who promises you the opposite is likely attempting to take advantage of your inexperience in investing or your trust in them. If someone pitches you a “zero risk” or “can’t lose” investment, do not believe them.
2. Obscuring Fees
Mutual funds, ETFs, or soft dollar arrangements all can involve unclear commissions and high management fees. Advising you to swap out your life insurance policy for a new and unnecessary one (“churning”) is another area where your financial advisor is likely receiving a hefty commission in exchange for their recommendation. All of these are examples of obscured fees. These costs can not only add up but also put your larger portfolio at risk. When your investments are tied up with high trading costs, proprietary funds, and commission-driven options, your investment advisor has a powerful incentive to recommend investments to you that may not suit your needs.
3. Pressuring You Into Decisions
Your advisor may be the expert, but they should still allow time for you to do your own research and reflect on an investment opportunity. When advisors push clients to act quickly, they may be attempting to cover up a scam or access your funds quickly to correct their own mistake. If you are being pressured into making a decision by your financial advisor, report it to their firm or manager.
4. Avoiding Written Documentation
Advisors who refuse to provide written agreements or confirmations are usually hiding something. A registered security should come with an extensive paper trail, including a prospectus, annual reports, SEC filings, and audited financial statements. If your advisor is recommending unregistered securities or other risky investments, they may attempt to avoid putting the details in writing. Always ask for the terms and conditions of your investment as an explicit document, instead of a phone call or handshake agreement.
5. Overly Complicated Explanations
While the market is complicated, advisors who rely on jargon or convoluted explanations may be obscuring important information on purpose. Additionally, not every investment opportunity is suitable for the average investor. If your advisor is recommending more complex strategies for your portfolio, like derivatives, Forex, or cryptocurrencies, take the time to examine why they are recommending only strategies that you are less likely to understand. If you are not sure where your money is going, do not invest.
6. Questionable Credentials or Licensing
Check your broker registration with FINRA and state licensing boards to ensure that your financial advisor is legitimate. Verifying their credentials is not only good practice, but you may turn up records of past scams or significant losses of which you were not previously aware.
7. “Exclusive” or Secretive Opportunities
Advisors promoting limited-access or secretive investments without full transparency are most often bad actors. While everyone wants to be cut in on the best deal, your financial advisor should only recommend aboveboard opportunities for your portfolio. Secretive opportunities like prime bank programs, access to private trading platforms, or “proprietary” investment formulas tend to be nothing more than ways for a fraudulent financial advisor to avoid sharing details that would make you realize the opportunity is a scam. By presenting an offer as exclusive, advisors can manufacture a sense of urgency or obligation that pushes clients to say yes.
Protect Yourself and Your Investments
As the age-old saying goes, “If it’s too good to be true, it likely isn’t.” Investment inherently involves some degree of risk. Stay vigilant and trust your instincts if you think that you are being offered a scam by even a trusted financial professional.
Unfortunately, some scam artists go to great lengths to obscure their fraudulent actions, and even the most careful investors may not realize they’ve been deceived until it’s too late. If you suspect that you have suffered losses due to a dishonest financial advisor, you may still have options to recover your funds. Contact an investment fraud lawyer to learn whether you may be able to file a FINRA arbitration claim or lawsuit.