Watch Out for These Red Flags When Getting Financial Advice

It’s hard to know who to trust online. Especially when it comes to your money.

The rise of TikTok financial influencers or “fin-fluencers” (just like Erika!) has helped spread the word about financial literacy. But unfortunately, not everyone online has your best interests in mind. 

Beware these six red flags that indicate a financial scammer — if you see them, take your money and run!

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1. Vague Claims That Can’t Be Substantiated

Morgan Housel, best-selling author of “The Psychology of Money,” says that bad financial advice abounds because there is so much incentive. 

“There is a lot of money to be made in the money business, and because of that there is a lot of bad advice,” Morgan says on an episode of the Erika Taught Me podcast. 

If you’re working with a financial advisor or following a financial influencer who makes claims about expected returns that seem too good to be true, they probably are. 

And if you ask for clarification on how results can be achieved, vague answers are a big red flag.

Some financial advisors and influencers will tell you what you want to hear to gain your trust and your business. But if the claims they make can’t be proven, or if the claims are just too outlandish, run away!

2. Sending Money Directly to an Advisor

Most financial advisors who manage your money don’t actually receive the funds. Rather, they use a third-party custodian to execute trades and hold your investments. 

So, if a potential advisor is asking you to send them money directly or to write a check directly to the advisor’s firm, be very wary.

Ask your advisor how your account works, including:

• Where your money is held
• How investments are purchased
• What institution holds those investments 

If the advisor doesn’t have a direct answer or just asks you to send money to them directly, it may be a sign to find another advisor.

READ MORE: Common Investing Mistakes to Avoid

3. Encouraging Day Trading, Not Investing

Investing is not the same as trading. But many finance influencers tout trading as a way to get rich quick. 

“I think there are a lot of people who want to be investors who are pushed into a trading product and end up having a bad experience with it,” says Morgan.

Long-term investors aren’t concerned with the short-term movements of the market — and anyone focused on what is happening weekly or daily is not an investor, but rather a trader.

Numerous studies have shown that passive investors who simply invest in broad-based index funds outperform active traders. 

And investing in something like an S&P 500 index fund outperforms actively managed mutual funds over a longer time horizon (10+ years). 

Morningstar keeps a database of passive investing versus active investing — and only 18% of large-cap active funds beat their passive peers from 2013 to 2023.

READ MORE: Long-Term vs. Short-Term Investment Strategies

4. Unprompted DMs

Many grifters will use DMs to convince you to join their program or sign up for their services — but with little proof or credentials to back up their claims. 

This is the equivalent of a telemarketing call.

If you get a DM from someone you don’t know or didn’t ask to contact you, you might want to block them. Or at the very least, do a little research on them before engaging in the conversation.

RELATED: Facebook Marketplace Scams to Watch Out For

5. If They Guarantee Results

When investing, the only “guaranteed” return comes from something like a high-yield savings account (HYSA), a certificate of deposit (CD), or U.S. Treasurys. Every other investment involves risk — including the risk of loss.

The same goes for your financial advisor. If they recommend a product or investment that offers guaranteed returns, there may be more to the story. 

Ask about fees and how they get compensated for this product. If the answers are unclear, you may want to say “no” to the situation and possibly find a new advisor.

READ MORE: How To Tell If an Investment Is Too Good To Be True

6. If They Engage in High-Pressure Sales Tactics

No financial advisor should need to push you into any specific investing strategy. They should instead be patient in answering your questions and educate you on the solution or strategy they are recommending.

If your advisor uses phrases like “act now or miss your chance” or “limited-time opportunity,” you may want to walk away. Large financial decisions require thoughtful consideration and should not be rushed into.

FAQs

How do you know if a trading platform is legit?

Trading platforms should be owned by a licensed broker that is regulated by FINRA. 

You can verify any trading platform by looking them up using FINRA’s BrokerCheck tool, using the firm’s CRD number. 

Brokers should also be insured by the Securities Investor Protection Corporation (SIPC). You can usually find this information on a trading platform’s website.

Do finance influencers have to be licensed?

Finance influencers aren’t required to carry any credentials or licenses. This makes it tough to verify and substantiate the authenticity and authority of someone you may follow online. 

But even licensed financial professionals can rip you off — so it’s more important to research someone before becoming a client or customer.

TL;DR: Be Careful Who You Trust With Your Money

While many financial influencers and financial advisors truly want what’s best for you, it’s important to be diligent in your research before handing the keys to your wealth over to someone else. Research any advisor before you hire them and interview thoroughly. 

Unfortunately, the financial advice industry is designed in some ways to make the advisors and brokers wealthy — not their clients. 

Make sure you clearly understand how anyone you hire gets compensated, what their approach to investing is, and how they can help you achieve your financial goals. 

And if you ever get a gut feeling that someone you’re about to hire is saying things that are too good to be true, they probably are.

For more tips on being smart with your finances, check out these episodes of the Erika Taught Me podcast:

• The Psychology of Money
• Why Getting Rich Is Easy and Being Patient Is So Hard
• You’ll Want to Fire Your Financial Advisor After Hearing This

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