6 red flags of a bad financial planner

May 31, 2013

By Karen Haywood Queen | Money Rates Columnist

A good financial planner can guide you toward useful products, boost the returns on your investments and help you design a sensible approach to retirement. A bad financial planner, on the other hand, may fail spectacularly on each of those counts -- and others.

How can you tell if you're stuck with an incompetent or unscrupulous financial planner? Here are six red flags you may encounter.

1. A turbulent backstory

If your prospective adviser has switched jobs frequently, it could mean trouble, says Jayne Di Vincenzo, CEP, president of Lions Bridge Financial in Newport News, Va.

"I've had advisers apply to work with me who have changed firms every two years," Di Vincenzo says.

When looking at an advisement firm, it may be wise to look into the turnover among the firm's advisers and staff, says Robert Schmansky, CFP, founder of Clear Financial Advisors in Bloomfield Hills, Mich.

"If there has been a lot of turnover among the professional staff, among the advisers specializing in certain areas, that could be a sign that those people aren't comfortable with the way things are being run," Schmansky says.

2. A one-size-fits-all philosophy

If the only tool you have is a hammer, everything looks like a nail. But if you encounter a financial planner who fails to look deeply into your individual situation, you may be better off looking elsewhere for advice. Di Vincenzo says these advisers are frequently more interested in selling products than they are in helping clients.

"Whatever your financial needs are, there's only one answer such as an annuity, whole life insurance, one hot stock, etc.," Di Vincenzo says, describing how some planners promote singular approaches. "Or everything you need is one product or one fund family. They're a product pusher, not a financial planner."

3. Constantly shifting tactics

Be wary if every time you meet with your adviser, he or she is recommending a change in investment strategy or hot new product, Schmansky says.

"I would be very cautious of an adviser who sees his value as offering you a product or service you can't get on your own," he says. "The reason they're recommending a new annuity may be the old annuity has stopped compensating the adviser as much. I saw that quite a bit with one adviser who focused on annuities."

4. No target return

Failing to define your target return number is a definite red flag, Di Vincenzo says. When building an investment strategy, the planner should set a target return and a standard deviation the client is comfortable with, she says.

For example, a client's average target return might be 7.5 percent with a standard deviation of 10 percent in a bad market and 20 percent in a horrible market. But that client might average 14 percent during good markets, she says. "You try to position clients for good returns in good markets," she says. "That's part of our whole planning process."

5. No tax strategy

Failing to account for taxes can be a sure sign that your planner isn't taking a comprehensive approach. Look instead for a professional who folds tax concerns into your larger investment strategy.

"Make sure your adviser has a tax plan strategy and make sure it's integrated," Schmansky says.

6. A static approach

Your planner should occasionally recommend rebalancing your portfolio based on your target return goal, Di Vincenzo says. "I recently had a portfolio come over that hadn't been rebalanced since 1998," she says. "The clients were getting ready to retire and hadn't heard from their adviser."

If you haven't heard from your adviser in 15 years, the red flags above may be the least of your worries.

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