Global View Investment Blog

5 Ways Bad Financial Advice Can Affect You

In a world of conflicts of interest, when everyone seems to be watching out for themselves and no one else, it’s important to know who you’re working with. This is especially true when it comes to a financial advisor. This person will determine when you can retire, how you can retire and what you’re able to leave behind once you’re gone. When you work with a financial advisor, you are placing your future in their hands, so you need to know you’re getting solid financial guidance from an honest and dependable financial advisor, rather than dealing with someone who places their self-interests above those of their clients.

How? Using fee only vs fee based advisors is a good place to start. Following bad financial advice can be catastrophic to your nest egg.

No financial advisor can see the future. But they should be making educated moves based on research, past and current market trends, and experience. The financial advisors at Global View take this very seriously; they invest right alongside their clients, so a bad decision would affect them as well.


Fee Only Vs Fee Based Advisors

Fee-only financial advisors will only except payment from their clients. A fee-based financial advisor, on the other hand, may charge their client fees but can also receive commissions based on products they sell. This can be dangerous and is when conflicts of interest really become apparent – if an advisor has the opportunity to make more money by suggesting a product that may not be the best fit for the client, a fee-based advisor may suggest it anyway. The advisor personally has something to gain.

A fee-only fiduciary financial advisor, however, can never intentionally give you bad or misleading advice or try to talk a client into something that he or she knows is not in the client’s best interest.

Unfortunately, as with any profession, there are bound to be financial advisors (really just salespeople) who are less competent, or maybe even self-serving, and this advice could end up costing you big time, so it’s important to do your homework.


Don’t lose money you can’t make back. Talk with the fee-only financial advisors at Global View to see how we are different.


Here are some ways getting lousy financial advice can affect you:

1. Having the Wrong Risk Tolerance

Risk tolerance is knowing how aggressively or conservatively you want to invest your money, based on how much you can afford to lose. Everyone’s risk tolerance is different and an advisor needs to understand and respect your personal level of risk tolerance. For example, if you have 25 years until retirement age, your risk tolerance is probably going to be a lot higher than someone who plans to retire in two years, and the guidance and recommendations your financial advisor offer should be vastly different between the two.

Often times, a financial advisor will ask you to fill out a questionnaire to determine your risk tolerance. But, according to U.S. News and World Report, these questionnaires tend to be flawed, and investors don’t always answer honestly. When you invest with the wrong risk tolerance, the result can be unmanageable.

This is why we use a more detailed process to determine clients’ risk. Instead of simply asking 6 questions, we use a more detailed test proven to be valid and durable because it uses a combination of psychology and statistics. Not only that, we make sure we show every client exactly how their risk tolerance will affect their portfolio. The risk tolerance determines the allocation to risk assets. That determines how much volatility every client should expect. We use charts to show them what that means so they know what to expect instead of being surprised.


2. Getting in Tax Trouble 

A legitimate financial advisor will never teach you ways to avoid your dutiful tax liabilities. If your advisor tells you to exaggerate or fabricate deductions, claim extra dependents or set up secret offshore accounts, you will almost definitely wind up on the IRS’ bad side. And if you think paying your fair share of taxes is expensive, wait till you see what you’d owe Uncle Sam after he tacks on additional fees and penalties.

Another possible pitfall is investing in something that might save you taxes in the short-term, but failing to account for the long-term or backend taxes.


3. Not Diversifying Your Investments 

Not diversifying your investments can be devastating, especially if you are nearing retirement age. Having a large portion of your assets allocated to just one or two stocks or mutual funds is risky, because the impact of a market downturn or stock collapse on your portfolio would be severe.

Imagine if you have 75 percent of your portfolio dedicated to the company you work for, and the company files for bankruptcy. What would happen to your job? What about your retirement? If you diversify your investments, you spread the risk out and the negative impact of a downturn or stock failure would have much less negative impact on your overall wealth.


4. Having an Outdated or Unsuitable Investment Plan

An annual review lets your advisor make sure you stay on track to meeting your financial goals. You may connect with your advisor now-and-then throughout the year, but the annual review gives you a chance to discuss things in your life that may impact your investments and might require updates to your investment plan. For example, have you changed jobs or experienced a significant change in salary? Have you gone through a divorce or recently gotten married? These are things to discuss with your advisor at an annual review.

Not regularly reviewing your investment plan with your advisor puts you at risk for not being prepared for things as they come up, and you could find yourself in a situation that no longer aligns with your saving ability.

Investing isn’t a set-it-and-forget-it kind of thing. You and your advisor need to make sure your financial situation still supports the same target asset allocation it did last year, and the year before that, and to make the necessary changes if it doesn’t.


5. Working With an Advisor Who Has a Conflict of Interest

How your advisor gets paid matters, and he or she should be upfront about that compensation. If there are hidden fees or commissions they “forget” to mention, or if an advisor can’t – or won’t – clearly explain his or her fees, that should send up a red flag.

Some investment advisors charge an hourly or flat fee, or base their fees on a percentage of the value of assets they manage. These types of compensation are known as “fee-only.” This means they earn their compensation in a defined and transparent way, and they don’t get paid for selling certain products. There is naturally less risk for conflict of interest with fee-only advisors.

Other advisors earn commissions by placing you in specific products they “sell.” When this happens, how can their sole focus be on helping you build your wealth? How can you be sure a financial advisor who works on commission has your best interests at heart? In truth, you can’t. This poses a conflict of interest, and it could mean your money isn’t being used to your best advantage.

Most insidious of all, most advisors use a combination of fees and commissions. Unless they can tell you, in writing, that they are fee-only fiduciaries in all aspects of your relationship, they are not. Buyer beware. You might end up with an insurance product you didn’t want, because the advisor is a “fiduciary” regarding investments, but not regarding insurance!

Make sure you understand the difference between fee only vs fee based advisors. If you have questions, contact us.


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Christie Simister

Written by Christie Simister

As Client Service Manager, Christie oversees the administrative issues that directly affect our clients’ goal attainment. She graduated from the University of South Carolina Upstate with a BA in Interdisciplinary Studies. Christie worked for W.W. Grainger for seven years and has a strong customer service background.

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