Avoiding Advisor Risk

As a DIY investor, I personally do not have an financial advisor helping me with my personal investments. I do have a lawyer that I use when need be, as well as an accountant helping me file my family’s tax returns. That being said, I am not at all against people having financial advisors if they do not have the time or energy to manage their own investment accounts. Personally I have chosen to take things into my own hands to save costs and because I love the investment process.[ad#tdg-embedded]

However, I am also the first one to admit that there are a high number of really bad financial advisors out there. In my opinion, if more people took a more active interest in their brokerage accounts and took the time to learn the process they would be much better off. It really comes down to not being scammed nor taken advantage of by an unscrupulous person. The trick is to recognise the signs and warning signals that these types of advisor exhibit which is easier said than done (a la the Madoff scandal)

Recently I was reading the most recent version of the book by Frank Armstrong called The Retirement Challenge which he was kind enough to send me. This is an excellent, down to basics book that I will definately be adding to my top book list. Included in the great advise in this book, there is an very interesting sidebar item that presents readers with a series of red flags of securities account mis-management. I had not seen a comprehensive list like this before and wanted to present that list to my readers here. I thank Frank and Jason Doss for for pulling this list together:

1. The client’s initial contact with the broker (used herein to mean stockbroker or other investment professional) was through a “cold call.”
2. The client is vulnerable to suggestions or pressures exerted by the broker due to age, infirmity, lack of sophistication, or other similar factors.
3. Whether sophisticated or not, the client does not understand the nature of the investment the broker has purchased.
4. The broker uses high-pressure tactics to obtain client approval for trades or purchases.
5. The broker makes promises of high returns coupled with low risk.
6. The broker claims to give client access to investment opportunities normally available only to very wealthy or otherwise well-connected investors.
7. The broker ignores or disparages client’s stated investment objectives and risk tolerances.
8. The broker places trades without the client’s prior permission.
9. The account statements reflect a high level of activity, with securities often being held short periods of time.
10. The portfolio is overweight in volatile stocks in the technology, biotechnology, internet, energy or other “hot” sectors.
11. The account has significantly underperformed benchmarks such as the Dow Jones Industrial Average or the S&P 500 Index.
12. The account statement reflects risky investments, such as volatile stocks, derivatives (options, futures, foreign currency), microcap stocks (small companies with unfamiliar names), and bulletin board stocks (not listed on major stock exchanges).
13. The cash balance reflected on an account statement unexpectedly shows up as a negative number, usually meaning securities have been purchased on margin.
14. Unexpected withdrawals of cash, particularly by wire transfer.

Interesting list and if any of these occur in your accounts then you need to act now. I was surprised to see that the promise of large returns was not on this list – if any broker promises you larger than normal returns then immediately question how they are going to do that and if it seems too good to be true then run.