The short answer
A red flag is a sign that deserves a closer look, and does not prove wrongdoing. The most common ones involve pressure, vague answers about pay, promises of results, and reluctance to put things in writing or to let you verify credentials.
Warning signs worth a second look
- Guarantees. Investing involves risk, including the potential loss of principal. Promises of guaranteed returns or “no risk” should prompt questions.
- Pressure to decide quickly. A sound recommendation can usually survive a few days of thought and a second opinion.
- Unclear pay. If an advisor cannot explain simply how they are paid, ask them to point to it in writing.
- Products you cannot get explained. You should be able to say back, in your own words, what you are buying, what it costs, and what the trade-offs are.
- Reluctance to share Form ADV or credentials. Registered advisers file a Form ADV that is publicly available.
- Money moving to the advisor personally. Client assets are normally held by an independent custodian in your name. Be cautious about writing checks to an individual.
- No written agreement. Services, fees, and duties should be spelled out in a document you can keep.
- A disciplinary history that goes unmentioned. Records can be checked independently.
Questions that help you verify
- How are you paid, and are you paid by anyone besides me?
- Are you a fiduciary for all of the advice you give?
- Where will my money be held, and who has access to it?
- What will I pay in a typical year, all in?
- Has the firm or anyone at it been subject to a regulatory or disciplinary action?
- What happens if I want to leave?
Where to look things up
- The SEC’s adviser search at adviserinfo.sec.gov for registration, Form ADV, and disciplinary history
- FINRA BrokerCheck for brokers and their records
- The CFP Board’s lookup tool for CFP® status
- The IRS directory of federal tax return preparers for enrolled agents
A flag is a prompt for questions, not a verdict
Some of these signs have innocent explanations, and no checklist can judge an individual. Use it to ask better questions. Our guides on how advisors get paid and what fiduciary means can help with the first two.
If you already work with an advisor and are unsure about something, a complimentary financial second opinion can give you another perspective. It seeks to answer your questions and does not assume anything is wrong.
