| Bad financial advice is often identified after the fact | | | | growth options available (mutual funds) and the actual |
| or with the 20/20 vision of hindsight. Perhaps it will be | | | | allocation (60%) to understand what the alternatives |
| months or years before you curse the advice that | | | | are. Bad financial advice pales when comparisons of |
| you were given. The possible consequences of the | | | | financial logic and options are made. |
| advice that you are given at a certain juncture may | | | | 4) Detect self-interest |
| be difficult for the uninformed to determine. | | | | If you're receiving advice from an insurance broker or |
| That bad financial advice can originate from the | | | | bank representative (not that these are the only |
| average Joe to the "accomplished" financial advisor or | | | | potential sources), you should be able to smell a rat. |
| financial expert does not make things easier for any | | | | It would be useful to know if the advice-giver is |
| of us. Fortunately there are some ways in which you | | | | getting commissions, cutbacks or appears to have an |
| can better position yourself to identify poor financial | | | | unfounded bias for a particular option. You may even |
| advice. | | | | ask them uncomfortable questions like, "How will you |
| 1) Become independently informed | | | | benefit from this?". |
| The adage is that "knowledge is power" (even | | | | Alternatively, you can ask "What will you get if I |
| though it is the use and application of knowledge that | | | | take this option compared to the other option?". |
| can be powerful in many instances). When you | | | | After you hear the version of "What's in it for me", |
| educate yourself, you are likely to know when | | | | you have to force them to answer "What's in it for |
| something is not accurate or practical about financial | | | | you?". If they squirm and stutter or the answer |
| advice. We cannot know everything, so you can | | | | shows some motive, it may be bad advice. |
| either become informed before or after the advice is | | | | 5) Bad advice is typically absolute and lacks context. |
| given. | | | | Suggesting that someone should "always buy term |
| This way, you can confirm if an insurance agent is | | | | insurance" or always buy "universal life insurance" is |
| engaging in "churning" or if your friend is giving you | | | | standard bad advice. Why? It can easily be |
| information that is anathema to your financial plan. | | | | contradicted and is not made in any context. "Always |
| When you're informed you'll also be more aware of | | | | buy term insurance for short-term life insurance |
| the consequences and implications of advice that | | | | needs" is better financial advice. Poor financial advice |
| you're given | | | | simply does not take into account your particular |
| 2) Ask questions | | | | circumstances or needs. |
| Bad financial advice cannot usually withstand a stern | | | | 6) It comes from a questionable source |
| examination. Even if you're far from an expert on | | | | Does the person seem to have a clear grasp on the |
| financial matters, you can use basic questions to | | | | financial topic they're expanding on? Or do they even |
| uncover a fallacy. If you're interacting with the source | | | | have a legal or fiduciary duty to give good advice? |
| of the bad advice, it's even better. When you ask | | | | Determining the expertise, experience and |
| "Why?" or "How does that work?", you could identify | | | | accountability of the advice-giver can give you a fair |
| bad advice because it's often wishy-washy and lacks | | | | idea of what bad advice versus good advice is. |
| cogency. | | | | Be very careful about this one though. Some qualified |
| If you're reading it, you have to look at the | | | | experts are capable of given bad financial advice. The |
| justifications provided. Each argument has a premise. | | | | most important criterion is accountability for the |
| Bad advice of any kind has fallacious, illogical or invalid | | | | advice that is given. Bad advice is less likely to be |
| premises and roots. Asking the right questions or | | | | given by those against whom redress can be sought. |
| "playing dumb" can really help you delayer the bad | | | | Conclusion |
| advice until the poor assumption or sinister motive is | | | | Successfully detecting bad advice may require a |
| revealed. | | | | combination of these methods. It would not |
| 3) Compare the advice to alternatives | | | | necessarily be enough to ask questions if you have |
| Whether you have to compare the advice you're | | | | no clue or idea of what's out there. However, with at |
| getting to other options or perspectives does not | | | | least five ways of identifying bad financial advice, it |
| matter. If someone tells you that you should place | | | | should be less of a problem. Always remember that |
| 60% of your investment portfolio in certain stock | | | | bad advice is a cancer that can handicap or |
| options, you have to evaluate both the alternative | | | | devastate your financial plan. Early detection is vital. |