What is Bad Advice?
Bad advice is any recommendation by an advisor or sales representative that undermines the achievement of your financial goals. Bad advice can be very difficult to identify for several reasons:
- Bad advice may be provided by someone you like and trust.
- Bad advice may not be intentional.
- Bad advice can be made to sound like good advice. Sometimes you don't know the advice is bad until you have the benefit of hindsight.
- Bad advice may be provided by someone you were told is a financial expert, but it's not true.
- Bad advice can be subtle. For example, your assets under-perform the securities markets by small amounts over long time periods.
Following are specific examples of bad advice:
- The advisor sells performance by recommending a "hot" mutual fund that has a history of extreme volatility.
- The advisor recommends an insurance annuity for your IRA assets.
- A bank sales representative sells you under-performing mutual funds that are owned by the bank.
- An advisor recommends stock mutual funds instead of bond funds because they pay higher commissions.
- An advisor recommends concentrating your investments, for example 50% in technology, because that strategy has worked in the past.
There are three sources of bad advice that you should be aware of:
- Incompetent advisors who don't have the knowledge to provide good advice.
- Unethical advisors who put their interests ahead of yours.
- Advisors who are required to sell low quality investments that produce higher profits for their companies.
It pays to remember you can't control the volatility of the stock market, but you can control the quality of your advisor that you select when you invest in the stock market.
