The Cost and Consequences of Bad Investment Advice

Many investors still rely on their investment advisors to provide guidance and to help them manage their portfolios. The advice they receive is as varied as the background, knowledge and experience of their advisors. Some of it is good, some of it is bad, and some is just plain ugly.

Investment decisions are made in a world of uncertainty, and making investment mistakes is expected. No one has a crystal ball, and investors should not expect their financial advisors to be right all of the time. 
That said, making an investment mistake based on sound judgment and wise counsel is one thing; making a mistake based on poor advice is another matter.
Bad investment advice is usually due to one of two reasons.  

The first is that an advisor will place his or her self-interest before that of the client.
The second is an advisor's lack of knowledge and failure to perform due diligence.

Each type of bad advice has its own consequences for the client in the short term, but in the long term they will all result in poor performance or loss of money.

Advisor's Self-Interest Meets Client's Best Interest

Most financial advisors are interested in doing the right thing for their clients, but some see their clients as profit centers, and their goal is to maximize their own revenue. Although they all like to see their clients do well, in the case of self-interested advisors, their own interests will come first. 

This will typically result in a conflict of interest and and can lead to the following bad moves:

1. Excessive Trading 
2. Using Inappropriate Leverage 
3. Putting a Client In High-Cost Investments
4. Selling What Clients Want, Not What They Need 

Poor Knowledge, Incompetence or Lack of Due Diligence

Many people have the mistaken belief that financial advisors spend most of their day doing investment research and searching for money-making ideas for their clients. In reality, most advisors spend little time on investment research and more time on marketing, business development, client service and administration. Pressed for time, they might not do a thorough analysis of the investments they are recommending.

Knowledge and understanding of investing and the financial markets varies widely from advisor to advisor. Some are very knowledgeable and exceptionally competent when providing advice to their clients, and others are not. Some advisors might actually believe they are doing the right thing for their clients and not even realize that they are not. 

This type of poor advice includes the following:

1. Not Fully Understanding Investments They Recommend
2. Overconfidence
3. Momentum Investing - Buying What's Hot
4. Poorly Diversified Portfolio 

Bad advice frequently results in poor performance or loss of money for investors. When choosing an advisor - or evaluating the one you have - stay alert for clues that might indicate that the advisor is not working in your best interest or is not as competent as you would like. After all, it's your money - if you're not happy with how you're being advised to invest it, it could pay to take it elsewhere.

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