Looking for a financial adviser? Beware these red flags

It might seem that nearly everyone wants to help you manage your money, offering a broad range of choices from which to find just the right financial adviser. But that expanded field also could make it more difficult to identify the bad seeds who would bungle your finances, ignore you or just plain rip you off.

Like a weed, bad financial advisers can crop up just about anywhere. They can be hard to recognize, especially by time-pressed physicians. But experts say there are some telltale warning signs.

Of course these red flags are going to vary by individual circumstances and needs. But there are general signals that you may want to start looking for someone else or at least proceed with caution.

The price is wrong

Topping many lists is the mishandling of fees or commissions. Any ambiguity about costs could signal that something is not right. "You need to know, 'what's the all-end cost to me,' " said Scott R. Rothbort, president of Millburn, N.J.-based LakeView Asset Management LLC, and a finance professor at Seton Hall University. "If he tries to be evasive, walk away."

Some experts believe commission-based cost structures make it difficult to see the total cost. "You don't know at the beginning of the year how much the whole thing is going to cost you," said Peggy Cabaniss, chair of the Chicago-based National Assn. of Personal Financial Advisors.

Others believe that commissions are warranted in some instances. Larry Landsman, a securities and commercial litigation attorney with Block & Landsman in Chicago, said a red flag could arise if the cost structure doesn't match the activity of the account. For example, he said, an account that rarely has any trades may be a better value for the client if it were commission-based rather than fee-based.

Rothbort said high upfront fees may create a problem because the adviser gets a huge initial payout and then has no vested interest in making sure that the investment makes money. But Dan Candura, a certified financial planner who runs PennyTree Advisers LLC, in Braintree, Mass., said high upfront fees may be warranted with some types of investments as long as they are "reasonable and consistent with the industry." Regardless of the fee structure, the key is that your adviser is clear and upfront.

Lack of experience

Knowing your clients is key in the financial services industry, and some experts believe that advisers who don't have experience working with physicians could create problems, or at least more work, for the first physicians who hire them.

"If someone has never worked with a physician before and knows nothing about the issues they face, I don't know if it would be a red flag, but it would be a warning. Are you going to be the person who helps bring them up to speed?" Cabaniss asked.

Similarly, a lack of experience in the types of services or products that the physician is seeking could portend uncertainty or extra work down the road. Cabaniss said that if the adviser can't provide some sort of track record about how their investment strategies have fared, it could raise another red flag.

Product pusher

Experts warn that advisers who are too adamant or insistent about certain services or products might have motives beyond your best interests. "People who talk too quickly about solutions and have really not taken time to talk to you and get to know what you need" should raise a concern, Cabaniss pointed out.

They may be revealing that they don't have a broad base of knowledge, which is problematic for people seeking a wider range of help. Cabaniss said physicians should ask, "Is this person really well-versed in just one area? Do they honestly know how to help me in all areas?"

Slave to fashion

Similarly, experts warn that advisers who follow only the latest trends, the hottest stocks and the same types of financial strategies that are in all of the financial newspapers and magazines might be failing to do their jobs. "In terms of flavor of the week, what value are you adding here if you are just doing what everyone else is doing?" Rothbort asked.

Following hot trends can lead to impetuous decisions or decisions not based on the client's specific needs.

"In a financial adviser, you really want dull," said Candura, who is also on the board of governors of the Certified Financial Planner Board of Standards Inc. "You're looking for a prudent adviser who's going to be more middle of the road."

Uneasy feeling

With some advisers, the red flags may surface more in a general lack of professionalism or service than in actual investing strategy. That could mean that the adviser doesn't keep you well-informed about trades or account activity, doesn't return your phone calls, doesn't answer your questions or just doesn't seem to "get" what you are talking about.

"If you feel uncomfortable and don't feel the adviser is listening just to you, and getting a sense of some sort of connection with you, that would be a huge red flag," Cabaniss said. She recommends a simple gut check.

Candura said it is especially important to feel comfortable with your adviser because it is such an intimate relationship. Advisers who give you a bad feeling because they are late, unkempt, too flashy or too loud may be best left to other clients.

"You're going to end up having to literally take off your financial clothes with this person. It ought to be someone you're comfortable with, like and respect," he said.

All roses and sunshine

Like many people, it can be difficult for advisers to admit that they have made mistakes. Those who won't make any disclosures along those lines, or won't say anything negative about their investment strategies, may not be telling you the whole truth, experts say. "They need to be able to tell you good and bad," Candura said.

That also means thoroughly discussing the risks and downsides of financial moves, and having a plan for navigating downturns in the market.

"Risk management is very important. When things get tough, there are some tough decisions to be made. You have to understand when it is time to get out and when are we just having a normal correction," Rothbort said.

Shady character

Perhaps a more obvious red flag would be if an adviser has had some sort of disciplinary action taken against them. Finding out is easier than many people realize.

The Securities and Exchange Commission's investment adviser page (link) and the National Assn. of Securities Dealers (link) both provide some online information about brokers and investment firms. Also, some state government agencies keep information about registered financial advisers, and the CFP Board of Standards (link) has information about certified financial planners.

Landsman said that in the business of trusted advice, a little skepticism can go a long way toward protecting yourself and your investments.

"It's a lot easier to run into the wrong person than most people think," he said. "The list is long, and that's why it's important to keep the conversation open with the broker. Even though it's someone you trust, and even if your account is doing well, [it's important] not to ignore red flags, because ultimately the responsibility comes down to the investor."