What is a red flag for a financial advisor?
When it comes to managing your money and planning for the future, a quality financial advisor can make all the difference. But your advisor needs to have your best interests at heart.
One of my clients prepared this article after a devastating experience with a previous financial advisor. Though this behaviour is not common, it reveals some important lessons for anyone feeling a little uncertain about the direction of their financial advice or just wondering what quality financial advice should be like.
10 red flags we missed with our financial advisor
Ours is a classic story of ‘we didn’t know what we didn’t know’ and simply trusted that the financial advisor we had chosen was acting in our best interests. We had no prior experience of financial advice and therefore no expectations – just blind trust. Only through some exposure to the world of financial advice via a work project did we start to wonder if our advisor was acting in our best interest. Red flags began to appear everywhere and at this time I had the good fortune to meet Luke Jensen at Propel Financial Advice. A quick run through of our red flags with Luke and we became aware that what we were experiencing was not quality financial advice. Here’s the top 10 signs we missed:
1. Pushing a specific product or investment type
Our former advisor seemed to love the idea of property investment, despite us never specifically identifying that as a goal. He recommended specific properties which I came to understand financial advisers generally are not allowed to do. Financial advisers can typically recommend property as an asset class for investment, but not specific properties. Red flag number 1!
2. Always changing your investment portfolio
Our former advisor would frequently make wholesale changes to our investment portfolio, with some investments only held for a few weeks. The reality was, that the suggested timeframe of these investments were 5-7 years, however our former advisor was making frequent changes that were nonsensical and in most cases never even aligned to our goals, objectives or risk appetite. He would quickly gloss over why it would be beneficial but we later understood there were significant costs to doing this, plus tax implications and longer term investment implications. Now we know that our investment strategy sets the structure for our portfolio, and that this is aligned with our goals.
3. Not reassessing goals
Perhaps the biggest lesson learned was that the financial advice we receive should only ever reflect our goals. And every client’s goals and circumstances are unique. It’s not what your financial adviser wants to do with your money, it’s what you want your money to do for you. If your goals change, then your financial advice might need to change too. And if your financial adviser isn’t regularly checking in on your goals, say at least once a year, there’s a red flag right there.
4. Not adjusting your financial plan when circumstances change
One of the best things about a quality financial advisor is that they listen to what’s happening in your life and immediately understand how that might impact your financial plan and goals. They take the time to get to know you and what’s happening in your life. One of the things we appreciate most about Luke is he thinks about things before we even do. New job? Luke is already on the case checking impacts to cashflow and insurances. One of the kids has a serious accident? He’s checked out their insurance policies before we even had to ask. Your advisor isn’t doing their job if they think your plan is set and forget.
5. Not reviewing your levels of insurance cover
We never realised that we had the right to refuse the annual insurance cover sum insured increases. Our former advisor behaved as though it was standard. Wrong! Your insurance cover should be reviewed every single year! Things change, priorities change, and you may need more or less coverage. We ended being overinsured for many years, while our adviser enjoyed the benefits of ever increasing commissions.
6. Frequently changing insurance providers
Big red flag! While there are some circumstances that merit switching insurance providers, it’s not typically something that should happen regularly. We now know that this was happening due to the larger commission received on new policies. This behaviour cost us coverage for an important medical condition that we can’t get back. What’s worse is that we didn’t even know we’d lost that coverage until we met Luke and he helped us understand the consequences of the switching.
7. Unnecessarily promoting self-managed super funds (SMSF)
One of the first things our former financial advisor recommended was setting up a self-managed super fund (SMSF). To this day I still don’t know why this was a good idea for us (turns out it wasn’t) but our advisor told us it was for the best. We’ve since learned that an SMSF suits specific types of investors with specific goals and knowledge. We fell into none of those categories. An SMSF also carries risks, costs, and requires significant investment knowledge. If your financial advisor is pushing an SMSF, make sure you fully understand how and why this supports your goals. In fact, this website gives you a quick idea of who an SMSF might be suitable for: https://moneysmart.gov.au/how-super-works/self-managed-super-fund-smsf
8. Not using plain language
Our former financial advisor would essentially bamboozle us with complicated terminology and investment concepts. I felt dumb and just thought I was out of my depth with this investing stuff, and that I should just do as he said. I am not dumb (naive perhaps!) and I am capable of learning – and financial advice doesn’t have to be complex. If your advisor can’t explain things in simple terms to a point where you feel confident, then you might need to reconsider your arrangement. A good financial advisor wants to educate you and help you understand, not confuse you so they can simply do as they please.
9. Unclear fees and compensation
I once referred a friend to our former advisor and she asked about fees. I realised I had no idea. I’d had this idea that he made some money from our insurance and when I asked him the answer was always vaguely ‘Don’t worry, the insurance covers it..’ Of course it covered it! And then some. I’m very happy my friend disregarded my referral. But if considering a financial advisor, one of the first things you should ask is how they are compensated. Financial advisors may charge fees in different ways—through flat fees, hourly rates, or a percentage of assets under management. However, if an advisor is vague or reluctant to explain their fee structure, that’s a huge red flag.
10. Pressure tactics or urgency
We had no prior experience with a financial advisor, so when he would rush us to sign up for an investment we thought he was being proactive and trying to secure an opportunity for us.
We know now that investments don’t just ‘pop up’ or need to be decided upon immediately – at least not for our situation or investment strategy. The best financial decisions are rarely rushed. Take your time to fully understand any recommendations and don’t let any advisor push you into making a decision you’re not ready to make.
Why we still believe in financial advice
With all this, it was entirely understandable if we waved the white flag and ran from financial advisors without ever turning back. But our early conversations with Luke helped us quickly understand that what we’d experienced was not quality financial advice. With a little bit of education and a lot of transparency, we could see the value of advice and wanted to enjoy the confidence and benefits of having a plan for our future. We just wished we’d met Luke long ago!
If you have any questions or would like to make an appointment, please contact the Propel Financial Advice team.
