It seems that, no matter who you are or where you go, someone has some financial advice for you. Whether it’s a hot stock tip from your brother-in-law or a fellow congregant at church longing to introduce you to an “amazing” opportunity, you need to be careful about where you get your money advice. Even a recommendation on a special credit card arbitration strategy from a coworker might not be the best way to use your money.
“Any friends and family with little education or work experience in the financial services industry shouldn’t be trusted for advice,” says Amy Parvaneh, the founder and CEO at Select Advisors, and finance professor at Pepperdine University. “Don’t forget how people got trapped by the Madoff Ponzi scheme. Everyone was just following their friends’ advice about a great financial advisor they should invest with.”
This doesn’t mean that non-professional don’t have anything valuable to say about money. However, it does mean that you should take what others tell you with a grain of salt.
Financial advice red flags
One of the reasons that letting family and friends give you the “inside track” on investments and other money advice is the fact that they could easily be dupes themselves. Some of the red flags associated with financial advice include:
- Too complex to explain: When someone tells you that a concept or strategy is too complex, that’s a red flag. “Follow the Warren Buffett strategy of only investing in strategies and companies that you fully understand,” says Parvaneh. If someone tells you that it “just works” run the other way.
- You have to decide now: The worst “opportunities” are often those that are only available for a limited time. If a coworker, friend, relative, or congregant tells you that you have to make a choice right now, it’s probably not a good idea. Legitimate, long-term investing opportunities will still be accessible after you’ve had time to properly vet the information.
- Guaranteed returns: Watch out for people who promise you specific returns, like clockwork. Most portfolios are going to have down years as well as up years. Anyone who has double-digit gains year after year is doing something fishy. A legit money manager or investment advisor won’t guarantee returns.
Affinity scams are among the biggest problems in the world of finance. These are scams in which someone poses as a member of a group to gain admittance and trust, and then offer an “opportunity” that turns out to be a bust. Affinity scams also work when someone convinces a trusted member of a community to commit to an investment and then draws other after them.
Before you trust the advice offered by someone else, stop and ask yourself why you trust them. If you trust them because you share a workplace, religion, or genome, that should be a red flag. Trust in financial matters should be based on education, knowledge, and expertise, as well as your own careful study.
Who should you trust for financial advice?
Parvaneh suggests finding an objective wealth manager or financial planner to help you navigate your financial choices. “Find someone who does not create or sell his or her own products, and has a compensation structure built around providing advice rather than trades,” she says. “A fee-based investment advisor who is either registered with the SEC or various states can be a good option.”
If you are looking for basic knowledge about financial subjects, it doesn’t hurt to talk to friends and family, or to look online for different ideas and strategies. There are a number of unprofessional resources that can provide you with food for thought. However, you still need to be careful, even if the money advice sounds good. “Your investment goals and risk tolerance may be significantly different than theirs,” Parvaneh points out.
Instead of taking everything — whether it’s from a financial guru like Dave Ramsey or Suze Orman, a successful amateur financial blogger, or your sister — at face value, it’s important to consider the source, and your own situation. Some strategies might be worth trying out in your life, as long as you aren’t risking more money than you can afford to lose.
Also, remember that some advice applies more when you are different stages of your life. Joe Saul-Sehy, a financial industry veteran and founder of Stacking Benjamins points out that someone who has their finances under control probably doesn’t need the basic, stripped-down advice that helps those struggling to pay off debt. Look for advice from people who understand your current situation, and whose approach matches your stage of life.
“Get as much education as possible,” says Parvaneh. Even if you feel as though you need to consult with a professional, you should still have a basic understanding of financial concepts. This will help you better identify poor advice, and give you more confidence as you move forward with your own financial plans.