7 Red Flags of a Shady Financial Advisor-Part 2


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#2: They Offer a “Free Lunch”

7 Red Flags of Shady Financial Advisors - Part 2

Financial advisors have used the strategy of the “free lunch” to generate new clients for decades. As you get older and closer to retirement, you are more than likely going to be bombarded with

invitations to lunches or dinners that are hosted by some type of investment firm. But keep in mind; most of these meetings are nothing more than high pressure sales pitches.

So the SEC has come out very strongly against free-lunch seminars reporting that they are, oftentimes, nothing more than an open door for con artists to find prey.

At these meetings you might hear something like, “You’ll get guaranteed profit – with no risk.” You may hear claims of consistently high returns, that it’s a groundbreaking or exclusive investment, and/or that there is a limited time to have access to the offer. If you hear this kind of language you should run for the hills.

Free-lunch seminars work on the concept of reciprocity. Fraudsters, disguised as generous financial advisors, often try to lure investors through free investment seminars; figuring if they do a small favor for you, such as supplying a free lunch, you’ll feel compelled to reciprocate by investing in their product.

Just because someone provides you a free lunch doesn’t mean you owe them your hard-earned money. At best, you’ve reciprocated by listening to the presentation – but ultimately, you don’t owe them anything.

If a free-lunch seminar does sound legitimate and you’re compelled to attend, there are some safeguards you should consider before you set foot in the door. Research the presenter, the host, and the product.

While you’re at the meeting, ask as many questions as you can; including:

  • What are the risks of the investment?
  • What are the initial and on-going costs?
  • What is the liquidity of the investment?
  • What is the length of time your money could be tied up?
  • Can you sell or cash in and what are the terms?
  • What surrender charges or related fees apply?
  • What type of investor is the investment most suitable for?
  • Is the investment registered?
  • What are the credentials of the speaker and company?

Towards the end of the event, you’ll likely be presented with an ‘irresistible’ offer that’s only available for a limited time and to a limited number of people. Read this well: do NOT buy at the event!

You should never take action and invest your money into an investment at an event like this while your emotions are running high, your adrenaline is pumping and your left-brained logic has been ‘unplugged.’

Be smart; agree to take the information home if it sounds like a legitimate company presenting legitimate information that is well suited to your investment needs. Take the materials home, do some more research, consult with others who may see blind-spots and take your time to make your decision. If it’s a good decision now, it will still be a good decision tomorrow.

However, if it sounds too good to be true, it probably is so you should make a beeline out of there.

Learn more about the ‘Free Lunch’ strategy here

#3: They Have a Conflict of Interest

Obviously, financial advisors are just like everyone else – they’re trying to make a living.  And they certainly deserve to do so, but it’s important that their income isn’t earned in a way that jeopardizes your best interest. You have every right to know how your financial advisors are paid.  And there are actually many ways financial advisors are compensated.

The first way that advisors can be paid is fee-only.  This means the only source of compensation your advisor receives is from fees paid directly to them from you. This could be in the form of a

  • Hourly fee
  • Retainer fee
  • Percentage of the assets under management

Regardless of the type of fee, you pay only a fee for services rendered and no other type of compensation is charged. That means no commissions are received, no financial products are sold and no commissioned annuities are recommended. In other words, the advice you get is totally independent of the financial products recommended.

The next way an advisor can be paid is fee-based. ‘Fee based’ means that not only does an advisor receive fees, they can also accept commissions. This system has the potential to create a conflict of interest, but not the same level of inherent moral hazard as financial advisors who are solely commission-based.

If someone receives commissions only they are not an advisor; they are a salesperson. These individuals are not fiduciaries and they have no obligation to put your interests first, which is a colossal conflict of interest.

Many times, people have no idea how their advisor is paid.  We’re often asked how Snider Advisors makes money, and we never hesitate to answer. Professional financial advisors want their clients to be informed about what they’re buying. If you don’t know how someone is paid, then you should ask directly, and if it’s confusing or they won’t disclose this information, you should walk away.

#4: They Sell High-Risk Investments

The next red flag is if someone sells investments that are too good to be true and high-risk. Here, in Texas, the Texas Board of Securities and the SEC both have a list of high-risk investments that you should look out for.

This partial list includes:

  • Foreign exchange trading
  • Oil and Gas
  • Digital currency and investments that pose a cyber security risk
  • Promissory notes and high-yield investment programs
  • Private Placements
  • Gold and Precious metals
  • Non-traded real estate investment trusts
  • Life settlement contracts – also known as viaticals

If you come across any of these types of investments, you should be extremely cautious and diligent to ensure the legitimacy of the investment. All of these opportunities are not scams but these types of investments are ridden with scams so you should be careful and do more due diligence than with other, more highly regulated, types of investments.

You should ensure that these investments, as with all others, are registered investments and read the prospectus and any other written information you can access. Finally, FINRA has a great tool you can use called the “Scam Meter” – which should help you discern the legit from the shady financial advisors. Learn more and use it here

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