Financial advisors are supposed to help you grow your money, not drain it. But not all of them have your best interests at heart. Some prioritize their commissions over your financial well-being, pushing risky, overpriced, or just plain bad investments. Their tactics can be sneaky, making it hard to tell when you’re being taken for a ride.
If you’re not careful, you could end up with investments that enrich your advisor while leaving you with little to show. Understanding their tricks is the first step to protecting your money. Here are some of the most common tactics they use to sell you bad investments.
Using Fear to Push Risky Investments
Fear is a powerful tool, and some advisors use it to their advantage. They might warn you about market crashes or inflation to push high-fee insurance products or unnecessary portfolio changes. Due to fear-based advice, long-term investors who stay the course tend to outperform those who make frequent changes.
Hiding High Fees
Some investments come with hidden costs that eat away at your returns. Many financial advisors promote mutual funds with high expense ratios or annuities with layers of fees because they get a fat commission. A report found that even higher fees can lead to significant losses to an investor’s retirement savings over time.
Pushing Commission-Based Products
Advisors who work on commission are incentivized to sell products that pay them the most, even if those products aren’t in your best interest. They might recommend complex annuities or loaded mutual funds because they get a kickback. According to the National Archives report, conflicted financial advice costs retirement savers an estimated $17 billion annually in lost returns.
Overcomplicating the Pitch
Some advisors use complex jargon on purpose to make things confusing. This can make you feel like you need their help to keep up. If you don’t fully understand an investment, it’s easier for them to push products that help them more than you. Always ask for clear explanations in plain language.
Selling Proprietary Products
Big firms often promote their investment products, even if better choices exist. Advisors may face pressure to push these in-house funds. These products can come with higher fees and sometimes lag behind other options. That means you might pay more and earn less. Always ask if an advisor’s recommendation benefits you – or their company.
Encouraging Unnecessary Trading
Some advisors push frequent buying and selling of investments, also known as churning, to generate commissions. This can result in tax consequences and increased costs for you. Investopedia warns that excessive trading often reduces overall portfolio returns, benefiting only the advisor collecting transaction fees.
Promoting Illiquid Investments
Private REITs, certain annuities, and non-traded funds can trap your money for years while paying hefty commissions to advisors. These investments can be complex to unload when you need cash. You might find yourself stuck, unable to sell quickly without taking a loss. That’s a big problem if the investment isn’t performing well.
Pushing High-Risk Alternative Investments
Some advisors encourage clients to consider high-risk alternatives, such as hedge funds or structured products, promising substantial returns. However, these often come with high fees and risks that aren’t disclosed upfront. Many investors later realized they had taken on more risk than they had intended. It’s essential to question what you’re buying and understand the downsides.
Misrepresenting Past Performance
Some advisors cherry-pick data to make investments look better than they are. They might highlight short-term gains while ignoring long-term underperformance. FINRA warns that past performance does not guarantee future results, yet many advisors rely on misleading charts to sell underperforming funds.
Avoiding Fiduciary Responsibility
Not all advisors are required to act in your best interest. Some operate under a “suitability” standard, meaning they only need to recommend something suitable for you – not necessarily the best option. Experts recommend working with fiduciary advisors, who are legally required to put your interests first.
Disclaimer – The Finance Key does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by The Finance Key of such content or services. Please do your due diligence and use your discretion.
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