3 Warning Signs of Financial Advisor Malfeasance

I have written often for this site on the potential benefits of working with a financial advisor, which I generally think is a really good idea for dentists. Part of the reason is that dentists often have so much on their plate that investing the time in being a good investor isn’t necessarily at the top of their list. But there are some dangers, too, in turning responsibility for your investment portfolio over to someone else. The key to doing it well, as it is with most things, is the simple strategem of “Trust, but verify.”

Sounds simple, right? But... how do you verify? If you’re working with an advisor who knows less about finance and investing than you do, you’re working with the wrong advisor. So how do you make sure your trusted advisor has earned that trust? Over two parts, we’ll look at a few missteps your advisor may make, and a couple you may make in working with an advisor. If you spot some of these behaviors in your own relationship, strongly consider making a change.

Not learning or adhering to your investment goals, or your core values. No advisor worth working with will suggest any transactions or investments prior to learning, in significant detail, what your investment objectives are and how you’d like to reach them. As part of this process, an advisor should be prepared to explain her core principles, her history in pursuing them, and how she goes about meeting them. This information-gathering is the foundation of a long-term partnership. An advisor in it only for the commissions or fees won’t spend a lot of time on it; someone interested in a long-term, mutually beneficial relationship will.

Being vague about how payments are structured. Specificity and detail are the enemy of any nefarious advisor. Bernie Madoff, the most notorious of the bunch, was able to carry on destroying people’s financial futures as long as he did because most of his customers didn’t ask detailed questions about how the returns were earned or how his fees were structured. They saw sustained growth and didn’t ask much about it.

Make sure you understand fully, and up front, what you’ll pay for, when, and how much. This will involve a slight descent into the weeds of how different financial fee structures work and why. But having that knowledge will give you peace of mind, even if you never use it again. And you don’t always have to understand something fully to be able to ask probing questions about it. That act of questioning alone may be enough to indicate to your advisor that you won’t simply go blindly along with whatever structure he is suggesting.

Ignoring your calls, your spouse, or your portfolio. An advisor who doesn’t return your calls may not be hiding anything nefarious, but he also isn’t hiding his indifference to your business. An advisor who talks to you with impatience or condescension is telling you that giving you full explanations isn’t worth her time. An advisor who ignores your spouse or partner is telling you to find another advisor.

A mistake you may make: One size fits all

Because many dentists are also business owners in addition to individual investors, the temptation may be to combine the expertise of one advisor who is given some responsibility over certain aspects of the business in addition to matters relating to your portfolio. While in some cases with an advisor you trust completely this might be acceptable, it’s generally a bad idea. For tax purposes and for many other reasons we’ll cover in an upcoming column, it is really important to keep a separation of church and state between your personal finance and business income and expenses. That should include any and all advice you receive from an advisor.

In part 2, we’ll look at some more subtle signs of advisor misbehavior, including putting their interests ahead of yours.