Planning your future often requires turning to a financial advisor whom you can trust as a fiduciary for guidance on personal investing, college trusts, income tax preparation, insurance, retirement planning, or estate planning.
Most financial advisors try to help their clients invest their money in areas that will give them a good return because they get paid more when the money makes money. The more money financial advisors can make for their clients, the more money they are able to make for themselves.
However, there are certain practices that some financial advisors may partake in that can effectively cheat their clients. If you are worried that your financial advisor may be ripping you off, here are some warning signs to look for when trusting your financial advisor with your money.
Have you ever wondered if your financial advisor is truly looking out for your best interests or simply padding their own pockets? You’re not alone With high-profile cases like Sting losing $16 million to an advisor who ended up in prison, or Kareem Abdul-Jabbar suffering millions in losses from questionable real estate transactions, it’s natural to be concerned.
I’ve spent years researching this industry, and the truth is that while most financial advisors are ethical professionals, there are definitely some bad apples out there. Today, I’ll break down exactly how to tell if your financial advisor might be ripping you off, and what you can do to protect yourself.
The Warning Signs Your Financial Advisor Isn’t Trustworthy
1. Commingling of Funds
If your advisor puts their name next to yours on the title of your investment account, that’s a very big red flag. They have complete freedom to use your money however they want because of this practice called “commingling.”
What to watch for: Check all statements you receive from your custodian. Your name should be the ONLY name appearing on the account.
The Certified Financial Planner (CFP) Board of Standards explicitly identifies commingling as a violation of the SEC’s Code and Practice Standards. If caught, advisors can lose their certification completely.
2. Excessive Trading (Churning)
If you notice a large number of trades happening in your account without any substantial increase in value, your advisor might be “churning” your account.
Why they do this: Financial advisors, especially brokers, often earn commissions on each transaction. More trades = more money for them, even if it doesn’t benefit you at all.
The solution is to open a “wrap” account, which charges a flat fee every month instead of fees for each transaction. This removes the incentive for unnecessary trading.
3. Unrealistic Investment Promises
If your advisor is promising high returns with minimal risk, be extremely cautious. This is often the hallmark of a Ponzi scheme, where returns for early investors are paid using funds from new investors.
These scams frequently target specific groups (religious communities, ethnic groups, or seniors) in what’s known as “affinity fraud.” Bernie Madoff’s infamous scheme worked this way for years before collapsing.
Step to protect yourself: Make sure that both your investments and the firm of your financial advisor are properly registered with the SEC. Most Ponzi schemes involve unregistered investments or firms.
4. Pushing for Power of Attorney
If your financial advisor insists that you should play a minimal role in your investments and tries to get you to sign over power of attorney, that’s a massive red flag.
With power of attorney, your advisor can legally trade your securities and potentially move returns or assets into accounts of their choosing—even their personal accounts. While this would be illegal, pursuing justice after the fact can be costly and time-consuming.
The rule: Never grant power of attorney to your advisor unless absolutely necessary. If you must, create a limited agreement specifying they can only trade securities without notifying you, but never move assets from their original accounts.
Signs You’re Being Pushed Around
Your financial advisor should work WITH you, not against you. There may be a conflict of interest if you feel like you are constantly being pushed to make investments you aren’t sure about during your regular meetings.
I’ve seen cases where advisors aggressively recommend products that generate higher commissions for themselves rather than what’s best for their clients. Your advisor should be responsive to your risk tolerance and financial goals, not their commission structure.
Fishy or Unclear Payment Structures
Yes, financial advisors deserve to make a living. But if you don’t understand how or how much you’re paying, that’s problematic.
Red flags include:
- Confusion about fees listed on your statements
- Inability to explain fee structures clearly
- Receiving commissions from products they recommend to you
- Evading questions about costs and services
Transparent advisors will fully disclose their fees and even discuss ways to reduce them while maintaining the services you need.
How to Protect Yourself from Financial Advisor Scams
Do Your Homework
Before hiring a financial advisor:
- Research their background and credentials
- Check for any disciplinary history
- Verify they’re registered with appropriate regulatory agencies
- Ask for client references
Understand How They’re Paid
Financial advisors generally make money in one of three ways:
- Fee-only: They charge you directly, either hourly, as a flat fee, or as a percentage of assets managed
- Commission-based: They earn money from the products they sell you
- Fee-based: A combination of fees and commissions
Fee-only advisors generally have fewer conflicts of interest, since they don’t earn more by recommending specific products.
Look for Fiduciary Duty
A fiduciary is legally obligated to act in YOUR best interest. Not all financial advisors are fiduciaries! Ask directly: “Are you a fiduciary 100% of the time?” Get the answer in writing.
Monitor Your Accounts Regularly
Even with the best advisor, you should:
- Review all account statements promptly
- Question any transactions you don’t understand
- Watch for unauthorized trading activity
- Meet with your advisor regularly to review your strategy
Is a Financial Advisor Worth It At All?
With all these potential pitfalls, you might wonder if working with a financial advisor is worth it. The answer depends on your specific situation.
Financial advisors can be extremely valuable if:
- You have a complex financial situation
- You don’t have the time or interest to manage investments yourself
- You need help with comprehensive financial planning
- You’re facing major life transitions (retirement, inheritance, etc.)
However, they may not be necessary if:
- Your financial situation is relatively simple
- You have the knowledge and time to manage your own investments
- You’re just starting out with limited assets
Alternatives to Traditional Financial Advisors
If you’re concerned about potential rip-offs but still want financial guidance, consider these alternatives:
Robo-Advisors
Automated investment platforms like Betterment or Wealthfront offer algorithm-based portfolio management with much lower fees (typically 0.25-0.50% compared to 1-2% for traditional advisors).
Fee-Only Financial Planners
Work with a fee-only planner who charges by the hour or project. This way, you get specific advice without ongoing asset management fees.
Financial Coaches
For help with budgeting, debt management, and general financial education, a financial coach might be more appropriate than an investment advisor.
The Bottom Line: Trust But Verify
Most financial advisors are honest professionals who genuinely want to help their clients succeed. However, the potential for conflicts of interest exists in any industry where money is involved.
By understanding the warning signs of unethical behavior, asking the right questions, and maintaining appropriate oversight of your accounts, you can get the benefits of professional financial advice while minimizing the risk of being ripped off.
Remember, it’s YOUR money. A good advisor works for you, respects your goals and concerns, communicates clearly, and earns your trust through transparency and results—not through pressure or promises that sound too good to be true.
Have you ever had experiences with a financial advisor that raised red flags? What did you do? I’d love to hear your stories in the comments!
Commingling Names on the Title of the Account
Putting their name next to yours on the title of your investment account, also known as “commingling,” gives them full permission to use the money however they choose.
Ensure all the statements you receive from the custodian have only your name appearing on the account. The code of ethics for the Certified Financial Planner (CFP) Board of Standards outlines commingling as a violation of the U. S. Those rules are set by the Securities and Exchange Commission (SEC) and if they are broken, people who hold these certificates could lose the right to use the CFP certification marks after their name.
How Do Financial Advisors Get Paid?
The payment structure for financial advisors can vary, but they earn money either through commissions or fees. Some advisors are kept on retainer, while others work per deal or hourly. Some charge by the transaction or the hour, while others may take a cut of all the assets you give them to manage.
Are Financial Advisors a Rip-Off?
FAQ
How to tell if your financial advisor is ripping you off?
A financial advisor should help you make informed decisions, but there are warning signs of a bad financial advisor that could indicate when they are doing otherwise. These signs generally include pushing unsuitable products, lacking transparency about fees, or being unresponsive to your questions or concerns.
Can financial advisors screw you over?
If an advisor has the ability to earn kickbacks and commissions it opens all kinds of doors for account churning (where they buy and sell frequently solely to generate commission), high costs funds, insurance products, and all sorts of other things that do not belong in your investment portfolio.
What is the most common complaint about financial advisors?
Poor investment performance, high fees, and a lack of communication are some of the most common things people complain about when they talk to their financial advisor.
Are financial advisors ripping you off?
However, there are certain practices that some financial advisors may partake in that can effectively cheat their clients. If you are worried that your financial advisor may be ripping you off, here are some warning signs to look for when trusting your financial advisor with your money.
Do financial advisors take care of your money?
It’s their job to look after your money, but that doesn’t mean they’ll always have your best interests in mind. To find out if your hard-earned money is safe with your financial advisor, pay attention to the above signs. Investopedia requires writers to use primary sources to support their work.
Are robo advisors ripping you off?
There’s still opportunity here for the individuals working for these brokerages to rip you off, but checking that it’s a regulated online broker can go a long way to ensuring your money is safe. Robo advisors aren’t robots trying to control your money, despite what the name might imply.
Can a financial advisor beat the average long-term returns?
Study after study has proven that the vast majority of people, including investment professionals, can’t beat the average long-term returns of the market after fees. Keep in mind, your financial advisor isn’t a top-tier stock trader no matter how good they are. Most of their day is spent managing clients and portfolios.
Why do financial advisors make so much money?
Most financial advisors strive to help their clients invest their money in areas that generate rich returns because they themselves tend to accrue commission on the positive returns. The more money financial advisors can make for their clients, the more money they are able to make for themselves.
Should you work with a financial advisor?
Working with a financial advisor can be an incredibly convenient way to manage your finances. However, not all financial professionals are created equal. We tend to think that anyone calling themselves a financial advisor or investment advisor must be more experienced and qualified than we ourselves are, but this isn’t necessarily the case.